Hellenic Bank projects 4% GDP growth for Cyprus

Hellenic Bank believes Cyprus’ macroeconomic outlook is positive and projects baseline GDP growth to be 4% this year and 3.9% in 2019.

In its economic review, the bank says that “the recovery phase has passed, and the economy is now entering its growth phase.”

“Cyprus’ macroeconomic outlook is positive and is accompanied by a significant increase in real gross domestic product during the first nine months of 2018, robust employment growth and further improvement in key domestic indicators.”

Hellenic said growth “is expected to be supported by private consumption and investment and by an improving and robust labour market.”

Public expenditure is also expected to contribute positively to growth through higher investment expenditures.

“The pick-up in domestic demand is expected to be reflected in improved labour market conditions with unemployment decreasing to 8.2% in 2018.”

Inflation in 2018, “is expected to remain at relatively low levels, at around 0.7% in 2018.”

The Economics Research Department is encouraged “the new growth phase, helping to avoid the repeat of the boom-bust cycle experienced in the past, has not been driven by government through public spending and the related multiplicative role, nor is it funded from unsustainable credit-fuelled consumption as observed in the pre-crisis period.”

It said public finances have been consolidated to a large extent to secure the sustainability of public debt.

“Significant progress has been made to restructure and restore confidence in the Cypriot banking system.”

“Cypriot banks have come a long way and are on a stronger footing.”

It refers to the sale of non-performing loan (NPL) portfolios by Hellenic Bank and Bank of Cyprus, the disposal of NPLs by Alpha Bank Cyprus outside the system, the recent adoption of legislative amendments, aimed at facilitating further sales of loans and strengthening the foreclosure and insolvency toolkits and the design of a social policy programme (Estia) by the government aimed at providing financial assistance to vulnerable distressed borrowers.

“The implementation of important structural reforms will help strengthen the competitiveness of the Cypriot economy,” said the review.

Outstanding reforms include the implementation of the privatisation agenda, public administration, local government and the healthcare sector.

“Further efforts should be made to improve and broaden Cyprus’ digital public services (e-government) including the promotion of electronic payments, which in turn will help develop a sustainable economy.”

According to Hellenic’s review, despite the important steps taken towards restoring the positive economic climate, some degree of uncertainty remains, as the country still has issues to resolve, such as the high level of non-performing exposures (NPEs), high unemployment and the high private and public debt, which are however on a steady declining trend.

The economic outlook may be negatively influenced due to the uncertainty surrounding developments in Italy, a slower than expected growth in the UK, the uncertainty of Brexit and a weaker pound.

“Also, increased geopolitical tensions in the Middle East and Eastern Mediterranean, could trigger adverse spillovers to economic confidence, tourism and consequently to the aggregate economic activity.”

Hellenic also argued that geopolitical tensions in neighbouring countries render Cyprus a safer tourist destination and could therefore counterbalance, any potential reduction in tourist traffic from the UK.

“Upside risks pertain to the buoyant confidence leading to stronger domestic demand as well as if exploitation of Cyprus’ natural resources prove financially viable.”