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

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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