Contraction may be milder says central bank, confirms Sapienta

The economy may contract in a more milder pace than anticipated, according to Central Bank of Cyprus estimates, with the Troika of international lenders projecting a negative growth of 4.2% of GDP this year, as against an initial estimate of -4.8%.

According to a flash estimate by the Statistical Service, the economy in the first quarter of 2014 contracted by 4%.

This confirms projections by Sapienta Economics last week that the Cyprus economy, one year after its painful 10 bln euro bailout featuring a haircut on uninsured deposits and stringent capital restrictions, will shrink by a less-than-expected 3.1% in 2014.

As a result of last year’s financial assistance programme imposed by the EU, the ECB and IMF, the economy contracted by 5.4% of GDP in 2013, which was way less than 8.7% initially projected by Cyprus’ lenders.

For 2015, the Troika projections are revised downwards for growth of 0.4% of GDP from the initial 0.9%. The Cypriot programme is reviewed on a quarterly basis with new projections issued after each review.

“The relatively improved picture projected by recent economic indicators concerning domestic demand in the first months of 2014 constitutes a factor which may suggest an even milder GDP contraction,” the central bank said.

The CBC described the implementation of the programme as very satisfactory, noting however that there is no room for complacency.

It also noted that the “progress in the banking system in 2013 and in early 2014 is significant and has begun to bear fruit.”

The Bank of Cyprus has been recapitalised with capital generated from the haircut, while the Hellenic Bank achieved its recapitalisation with private sector money.

“As a result of the recapitalisations, the banking sector has significant capital which may be used to absorb possible further shocks,” the CBC added.

The CBC noted however that “restoring confidence in the banking system demands constant efforts with serious technocratic handling,” adding that ensuring satisfactory liquidity to the economy, the management of nonperforming loans and strengthening corporate governance in the banks are issues of priority as well as the necessary preconditions for restoring the banking sector’s credibility.