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Cypriot economy to grow 2.7% in 2016, University of Cyprus says

By Stelios Orphanides

The Economic Research Centre of the University of Cyprus said it revised its economic growth rate to accelerate in 2016 to 2.7 per cent from a previous 1.5 per cent October forecast even as bad loans remain a considerable downside risk.

The economy’s rate and employment strengthened in the third quarter of 2015 while other domestic leading indicators improved in the last three months of 2015, the academic institution said in a statement on its website on Tuesday. The indicators included tourist arrivals, credit card usage by locals and tourists, motor vehicle registrations, cement sales, registrations of new companies.

The improved indicators also prompted the Economic Research Centre to project a fourth quarter annual growth rate of 2.8 per cent. Inflation in 2016 is projected at 0.3 per cent as a result of low energy prices, even as consumer prices are expected to pick up in the second half of 2016 “as activity and demand will continue to firm up”.

“The recent reductions in domestic lending interest rates, amid conditions of weak demand and high unemployment, as well as stronger normalisation tendencies in the banking system facilitate the recovery,” the ERC said. “Domestic economic confidence strengthened in 2015, despite some short-lived setbacks related to developments in Greece; a further upturn in all domestic sentiment indicators in the fourth quarter of 2015 is found to improve the outlook. Lower international oil prices, downward pressures to the domestic aggregate price level and low inflation in the EU are expected to assist recovery through their effects on real incomes and demand”.

The Economic Research Centre said that a “modest” economic growth in the euro area the UK’s “steady” growth combined with an improved economic sentiment in Europe favour Cyprus’s economic recovery, the weaker euro vis-à-vis other currencies, “most notably the British pound,” is expected to boost demand for exports of goods and services, in particular tourism.

“Reductions in the European lending interest rates during the second half of 2015 reflect (the) European Central Bank’s accommodative monetary policy stance, which is supportive of the recovery process in Cyprus,” the academic centre said.

The non-performing loan ratio in the Cypriot banking system which stood at 48 per cent continues to pose “major risks” for Cypriot banks and the economy’s outlook, the Economic Research Centre said. “Ineffective implementation of the new insolvency and foreclosure legal framework could delay the resumption of healthy credit conditions and robust economic growth”.

The delay in implementing structural reforms, part of Cyprus’s bailout terms, which include the public administration, privatisation and the healthcare system, may create risks for the government’s finances, Cyprus’s market borrowing costs after the country exits its adjustment programme in March, the centre said

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