Hellenic Bank foresees a positive macroeconomic outlook this year, a reduction in unemployment, and further improvement of key domestic indicators.
According to the lender’s economic review, published on Tuesday, the island’s economy is expected to grow by 2.6 per cent this year and 2.8 per cent in 2017.
“The pick-up in domestic demand is expected to lead to further improvement in labour market conditions in the coming months. On the other hand, inflation is expected to remain low,” Hellenic’s department of economic research said.
Hellenic said during the three years of the bailout adjustment programme, Cyprus managed to come out of recession, consolidated its public finances and stabilised its stricken financial sector.
The progress achieved was reflected in the ratings’ upgrades, demonstrating the flexibility of the economy.
“Fiscal developments have largely out-performed the balance targets that were set at the beginning of the Programme, which are set to contribute to ensuring strong fiscal governance in the coming years,” the review said. “The better than expected performance of the economy, along with the prospects for recovery, create a positive climate which enhances economic growth.”
Implementation of all structural and institutional reforms is an important pillar for improving the business environment and promoting investments, the lender said.
The creation of a more efficient regulatory framework will facilitate the attraction of productive investments, which currently remain low and impeded by certain structural weaknesses — for instance, dealing with construction permits and enforcement of contracts.
Despite the improvement, challenges still remain.
“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 elevated level of household and corporate debt,”
A key factor for the banking sector’s stability would be to address the high level of non-performing exposures.
The latest data show that loan restructurings were proceeding at a faster pace. At the same time, the improved macroeconomic environment is expected to further support banks’ efforts to tackle the high level of NPLs.
The department stressed that Cyprus’ economy may be negatively influenced by the weaker than expected growth in the UK as a result of increased uncertainty following the decision to leave the EU.
Possible deterioration of the Russian economic outlook and increased geopolitical tensions in the broader region, which could trigger adverse spill-overs to economic confidence, tourism, and consequently to the aggregate economic activity, were also factors to consider.
On the other hand, tensions in neighbouring counties render Cyprus as a safer tourist destination and could therefore offset the potential reduction in tourist traffic from the UK.