EY: Renewed external funding to support Cyprus growth, but Greece is a worry

The ending of capital controls and the approval of key insolvency laws should clear the way for a resumption of funding under Cyprus’ 10 bln euro international bailout agreed in March 2013, according to the June 2015 EY Eurozone Forecast (EEF), that added that this will bolster prospects for a return to growth.

Despite short-term headwinds from the recession in Russia and fresh uncertainty about a possible Greek Eurozone exit, Cyprus’ GDP grew 1.6% on the quarter and 0.2% on the year in Q1 this year. As a result, after three years of decline, GDP is now forecast to grow 0.3% in 2015, the EY report said.

The EEF said that the latest policy developments, expected to trigger a resumption of IMF, ECB and European Commission funding, suspended since October 2014, may be an important milestone, as Cyprus moves toward an exit from its bailout and a return to market-based financing, underlined by its successful EUR 1 bln international bond issue at the end of April.

The EY reported also noted that the government has announced some modest economic stimulus measures, including infrastructure spending, aimed at creating new jobs (unemployment remains high at 16%) and stimulating domestic demand. Together with the resumption of external funding, EY now forecasts stronger GDP growth of 1.3% in 2016, followed by a steady pickup to 2.2% in 2019.

“Growth prospects for 2016 will be assisted by ongoing recovery in Europe and an expected return to growth in Russia, after the recession there slows growth of tourism and other services this year.

“There are already signs of stronger tourism after a sharp setback in Q4 2014, with the number of Russian visitors (25% of total visitors) now picking up again.”

Worsening deflation in recent months (with prices falling 1.7% on the year in April), due to lower oil prices and constraints on consumer spending from high unemployment, could hold back investment recovery in 2015. But a return to positive inflation, forecast to average 1% in 2016 and then climbing to about 2% a year in 2017–19, should help by reducing real interest rates and the burden of debt, the EY report said.