Hellenic Bank, Cyprus’s third largest lender, said that it expects economic growth to accelerate to 2 per cent in 2016, up from 1.6 per cent in 2015, gradually helping reduce unemployment and non-performing loans, even as the latter continue to pose a major risk to stability.
“Despite the important steps taken towards restoring the economic climate, some degree of uncertainty remains, as the country still has certain issues to resolve, such as the high volume of non-performing exposures, high unemployment and the implementation of the privatization initiatives and public sector reforms,” Hellenic said in its quarterly economic review.
Hellenic’s forecast is in line with that of the finance ministry. The International Monetary Fund forecast that the Cypriot economy will grow 1.6 per cent this year.
Still, “the commitment regarding the implementation of the economic adjustment programme has been the cornerstone for the return to economic growth,” which led to better than expected economic performance, reflecting “the flexibility of the Cypriot economy as well as the momentum and the potential of the modern economic environment in Cyprus”, Hellenic said.
While banks are making progress in addressing their stock of bad loans, comprising roughly half of their overall loan portfolio, an “ineffective implementation of the new insolvency and foreclosure legal frameworks could delay the resumption of healthy credit conditions and robust economic growth,” the bank said.
Exogenous factors, including the continuing uncertainty over the implementation of Greece’s adjustment programme, agreed in 2015, the slowdown of Russia’s economy and increased geopolitical tensions in the region, transmitted via economic sentiment and tourism, may also negatively affect Cyprus’s economy, Hellenic added.
“Additionally, developments over a potential reunification of Cyprus along with the exploitation of Cyprus’ natural resources are being closely monitored in order to assess the potential prospects that are being developed,” the bank said.
Hellenic said that it expects inflation to remain low, reflecting the drop in energy prices.