Cyprus Returns to Positive Economic Outlook

International credit rating agency Standard and Poor’s (S&P) has released its most recent evaluation of the Cypriot economy through which it reveals its upward outlook revision from stable to positive.

Maintaining the island’s “B+/B” rating, the agency cites superior economic performance in relation to previous predictions as the basis of its favorable revision.

The S&P report explains: “The outlook revision reflects our view of the faster-than-expected reduction in Cypriot general government debt, supported by less adverse economic growth prospects than previously.”

It further estimates that the economy will effectively bottom out in 2015, following which it will gradually strengthen, based on a resilient business services sector, solid tourism sector, and gradually recovering private consumption.

The agency cautions, however, that investment growth will remain negative, as the process of deleveraging by domestic banks continues.

It continues: “As a result of the government’s past and expected budget deficit reductions, against the background of gradual recovery in economic growth over our 2015-2017 projection period, we expect the general government balance will average about negative 0.7% of GDP over 2015-2017, compared with our previous projection of negative 2.4% of GDP.”

Acknowledging that its projections are subject to uncertainty, due to various potential shocks to Cyprus’ small, open, services-based economy, Standard and Poor’s notes that the economy will return to growth in 2015, for the first time since 2011.

S&P cites the depreciation of the Russian ruble and the expected contraction of the Russian economy, alongside the EU sanctions imposed on several large Russian commercial banks and companies, as the main factors which may weigh on the prospects in key Cypriot sectors, including tourism and business services.

“Still, despite an estimated 4% decline in nominal GDP growth last year, Cyprus’ budget deficit narrowed by nearly two percentage points of GDP to about 3% of GDP, to below the outcomes we expected for many eurozone (European Economic and Monetary Union) economies that saw positive growth,” the agency adds.

Finally, S&Ps notes that financial stability continues to remain a key risk as the banks’ asset quality deterioration continues and Non Performing Loans amounted to almost 55% of total assets in November 2014.

“Although the new legislation regarding foreclosures and insolvency procedures adopted this year could improve conditions, we think the outcome is still uncertain. We continue to consider that the economic adjustment program’s €1 billion financial sector support buffer provides the government with leeway to address financial sector stability risk,” it concludes.


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