A mix of factors consisting of domestic and external risks related also to the banking system and a slowdown of the reform process, could upset the recovery process of the Cypriot economy and subsequently the implementation of fiscal policy over the next three years, the finance ministry said.
“The biggest risks are external” as the economy in the European Union and the single currency bloc continues to remain fragile,” the finance ministry said in its fiscal policy framework 2017-2019 on its website. This fragility is related to Greece, which has been unable to help its economy stabilise six years after entering a programme, and the risk of the UK abandoning the European Union after a June 23 referendum which will decide the country’s EU-membership.
A probable Brexit “is expected to affect the UK’s and the EU’s economy unfavourably with repercussions for the Cypriot economy,” the ministry said. The UK is traditionally Cyprus’s largest source of incoming tourism and second largest buyer of Cypriot exported products, just behind Greece.
Geopolitical events in the Middle East region, the refugee crisis and the Russian-Ukrainian crisis are sources of additional uncertainty for the economies of the EU member states, including Cyprus, and the Russian economy, which is Cyprus’s second largest source of incoming tourism and a major buyer of other services, the ministry said.
The finance ministry which expects the Cypriot economy to expand 2.2 per cent this year before growth accelerates to 2.5 per cent over the next three years, said that “a slowdown of the reform effort or a relaxation of fiscal policy” could also affect the macroeconomic scenario.
It also said that the banking sector continues to face challenges related to its high ratio of non-performing loans which make up roughly half of its overall portfolio.
“Despite all this, the whole framework created offers proper incentives both to lenders and borrowers to go to the negotiations table to address loans in arrears,” the ministry said. “The effective implementation of the Central Bank of Cyprus’s code of conduct on restructurings, the creation of restructuring units by banks to deal with recoveries, the implementation of the law on the sale of loans and the existence of the foreclosure and insolvency framework, are positive developments which are expected to facilitate towards solving the problem”.
The finance ministry said that there is a risk of contingent liabilities related to decisions of the bank resolution authority challenged at the courts in Cyprus and abroad which could potentially upset the budget. While the ministry offers no further details on the pending trials, the latter may be related to a case filed at the International Chamber of Commerce by FBME Bank, the Tanzanian lender blacklisted in the U.S. after it was linked to money laundering, and other cases filed by depositors and investors who lost money in the 2013 banking crisis.