Fitch ratings agency expects the recession in Cyprus to be deeper than what international lenders forecast, with the island returning to growth in 2017 and not 2015.
“The agency expects output to contract by around 5.0 per cent in 2015 and 1.5 per cent in 2016 and not return to growth until 2017,” the agency said.
International lenders, the troika, predict that Cyprus will return to growth in 2015.
Last week the troika eased its forecast, saying Cyprus’ economy will contract by 7.7 per cent this year from an earlier 8.7 per cent. They did however raise their forecast for 2014 to 4.8 per cent from 3.9 per cent.
In its evaluation, Fitch said it expected GDP in 2013 to contract by 7.0 per cent, compared with its earlier forecast of nearly 9.0 per cent.
Despite the economy performing better than expected, the outlook remained bleak, Fitch said.
“The economy is likely to remain in deep recession in 2014 with the downturn lasting longer than assumed under the EU-IMF programme.”
Fitch said initial record of implementation under the troika programme has been good, with fiscal outperformance relative to targets in 2013.
“However, there remains a high risk of the multi-year programme going off track due to downside risks to economic performance or a weakening in political commitment to the programme.”
Fitch said there have been some initial signs of positive economic adjustments.
Growth in employee compensation has fallen below growth in productivity, leading to an improvement in labour costs, the agency said.
And the current account deficit has narrowed to around 2.0 per cent of GDP in 2013 from over 6.0 per cent in 2012, albeit primarily reflecting a contraction in domestic demand and imports.
The agency said confidence in the island’s banking sector will take rime to restore but it did not expect “any additional public funds to be used to support the sector beyond the €1.5 billion budgeted” for co-operatives and the €1.0 billion buffer in the bailout programme.
Fitch said the capital needs of the banking sector were estimated under very conservative assumptions earlier in 2013.
“Despite expectations of further deterioration of asset quality the capitalisation of banks should, therefore, remain above regulatory requirements through the programme period.”
Capital controls introduced in March to prevent a bank run are being lifted, Fitch said, but it warned that the process carried risks.
“A premature exit could trigger material capital flight with negative economic consequences,” the agency said.