Renewed External Funding to Support Growth in Cyprus Says EY Report

The lifting of capital controls and the approval of key insolvency laws should clear the way for a resumption of funding under Cyprus’ €10billion international bailout agreed in March 2013, details the Cyprus chapter of EY’s Eurozone Forecast (EEF), published on June 19.

According to the EEF, this will bolster prospects for a return to growth. Despite short-term headwinds from the recession in Russia and fresh uncertainty about apossible 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 EEF says that the latest policy developments, expected to trigger a resumption of International Monetary Fund (IMF) and European Commission (EC) funding, which had been 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 €1b international bond issue at the end of April.

The Government has also announced some modest economic stimulus measures, including infrastructure spending, aimed at creating new jobs (the unemployment rate remains high at about 16%) and stimulating domestic demand. Together with the resumption of external funding,we now forecast stronger GDP growth of1.3% in 2016, followed by a steady pick-up 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,” says EY. There are already signs of stronger tourism after a sharp set-back 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 yearin 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.

SOURCE: Gold News

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