In­ter­nal and ex­ter­nal risks to the Cyprus econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

De­spite the tragic events of March 2013, Cyprus has shown re­silience and the econ­omy was able to re­turn to sta­bil­ity and re­gain some of the lost con­fi­dence from in­ter­na­tional mar­kets and in­vestors rather quickly, which is nec­es­sary for a re­turn to growth and grad­ual re­duc­tion of un­em­ploy­ment.

This was an out­come of a num­ber of fac­tors – a re­ces­sion much milder than what was ex­pected, sta­bil­is­ing un­em­ploy­ment (or at least ris­ing at a slower pace), public debt kept at sus­tain­able lev­els, di­min­ish­ing bud­get deficits, and a pri­mary sur­plus achieved well be­fore when ev­ery­one (in­clud­ing the in­ter­na­tional lenders) pre­dicted. This out­come was re­flected in five suc­cess­ful Troika re­views, suc­ces­sive credit rat­ing up­grades by all three rat­ing agen­cies, a sub­stan­tial re­duc­tion of yields on our gov­ern­ment bonds (we were able to bor­row suc­cess­fully from the in­ter­na­tional mar­kets af­ter al­most four years), and for­eign di­rect in­vest­ment to re­cap­i­talise our bank­ing sec­tor. How­ever, many risks still re­main that can eas­ily put us off track and stop us from re­turn­ing to the cov­eted growth.

The progress of our ad­just­ment pro­gramme is on hold since last sum­mer mainly be­cause of the suc­ces­sive ex­ten­sions by the par­lia­ment of the sus­pen­sion of the fore­clo­sure law. At the same time, our par­lia­ment needs to pass the pack­age of five in­sol­vency bills.

This de­lay is cost­ing us a lot, and puts the econ­omy in dan­ger. First, it cre­ates con­sid­er­able un­cer­tainty whether we will be able to keep our com­mit­ments as it re­lates to what was agreed un­der the MoU. Fur­ther­more, it takes away a key tool that the banks re­quire to ex­ert more pres­sure on the bor­row­ers who refuse to co­op­er­ate, and as a re­sult the big prob­lem with the non-per­form­ing loans re­mains un­re­solved (and is get­ting worse).

The gov­ern­ment was hop­ing to be able to bor­row from the in­ter­na­tional mar­kets in the first quar­ter (or first half) of this year, but this prospect now looks re­mote as the gov­ern­ment bond yields have gone up re­cently (and they would in­crease even more if the un­cer­tainly in our pro­gramme, as well as the Greek pro­gramme, per­sists). If this sit­u­a­tion con­tin­ues, we run the risk of not meet­ing the tar­gets that we aimed and as a re­sult would be stuck in a re­ces­sion for a longer pe­riod of time.

Right now, we are fac­ing two main ex­ter­nal risks that can have a big im­pact on our econ­omy and the prospects for 2015. First, we are neg­a­tively im­pacted from the re­ces­sion that the Rus­sian econ­omy is fac­ing. Rus­sia has suf­fered a lot lately, mainly due to the sanc­tions im­posed by the US and EU, as well as the big drop in oil prices. The Rus­sian rou­ble has lost al­most half its value to the US dollar in the last 12 months, in­fla­tion has sky­rock­eted to more than 15%, con­sumer con­fi­dence has plunged, and real wages are ex­pected to drop by 9% for 2015. A re­ces­sion of 3% is ex­pected for this year.

As Rus­sia is a ma­jor busi­ness part­ner of Cyprus, un­for­tu­nately the prob­lems with the Rus­sian econ­omy will have a big im­pact on ours.

Then, we have the is­sue with the Greek eco­nomic stand­off and if it con­tin­ues for much longer, it cer­tainly does not help our sit­u­a­tion. First, it cre­ates un­cer­tainty about the euro lead­ing to higher bor­row­ing yields for our gov­ern­ment. Sec­ond, although our banks have ex­ited from the Greek bank­ing sec­tor, there are still sub­sidiaries of Greek banks that might be neg­a­tively af­fected if the sit­u­a­tion with the Greek pro­gramme is not re­solved. Third, Greece is nat­u­rally one of our main trade part­ners and there­fore prob­lems in their econ­omy af­fect ours.

In short, 2015 has not be­gun well. Although it’s dif­fi­cult to pro­tect our econ­omy from the ex­ter­nal risks, what we can do at least is make sure that we solve our in­ter­nal prob­lems that ex­ist right now that put an ob­sta­cle to any sort of fu­ture growth.

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