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Cyprus

EU Commission says recovering Cypriot economy still facing risks

The European Commission said that Cyprus’s economy continues to face challenges after completing its adjustment programme which helped it stabilise its banking sector and consolidate its budget, two symptoms of the crisis which forced it into a bailout in 2013 and “left legacy issues”.

Reforms implemented in exchange for loans “have started to bear fruit” allowing the economy to grow 1.6 per cent in 2015 -for the first time in more than two years- and employment to increase 0.9 per cent, even as long term unemployment and the youth unemployment rate remain high, the Commission said in a working document on Thursday.

“The recovery has been moderate and mainly driven by internal demand, while inflation has remained negative,” the Commission said. “Investment is still dampened by high corporate debt, and the housing market remains depressed,” with non-performing loans making up roughly half of the banks’ portfolio, constraining new credit.

Still, vulnerabilities related to private and public indebtedness continue to persist with reduction in the cases of corporations and households “proving very slow,” the Commission said. On the other hand, even following the fiscal over-performance of the past three years, “debt sustainability remains subject to sizeable risks”.

“Risks relate in particular to a possible reversal of the fiscal adjustment achieved under the program, to adverse macroeconomic shocks, and to insufficient implementation of fiscal-structural reforms set out during the programme, including the public administration reform,” the Commission continued.

The impact of new legislation on foreclosure and insolvency to reduce debt stocks, “has so far been limited,” the Commission said. “In particular, existing inefficiencies of the court system are among the factors that constrain the efficiency of the new framework”.

In addition, Cyprus’s net international investment position, which is the difference between the value of assets abroad owned by Cypriots and the assets in Cyprus owned by foreigners, “is among the most negative in the EU, but risks are significantly reduced,” the Commission continued adding that the related risk is “limited” given the also limited interaction of foreign companies with the island’s economy.

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