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Brexit impact on Cyprus to be marginal, Central Bank says

The Central Bank of Cyprus said that it does not expect the decision of British voters to leave the European Union will have a “significant impact” on Cyprus’s economy.

Any effect will be “slightly negative and manageable” in the short term, the CBC said in its December economic bulletin.

Still, individual sectors, such as the hospitality industry, could be affected to some extent, the CBC said, adding that the impact would be transmitted via a weaker sterling and weakening consumer and business confidence. Other sectors, such as trade, could be affected to a lesser degree.

“In general, possible negative consequences for exporting sectors, such as tourism, are expected to be offset to a high degree by a positive impact from cheaper UK imports,” the CBC said. “The possible signing of trade agreements between the UK and Cyprus could contain the impact on the domestic economy even more”.

In 2015, 39 per cent of tourist arrivals in Cyprus came from the UK, compared to 52 per cent in 2008. Directly or indirectly, tourism accounts for roughly one quarter of the Cypriot economy, which exited a prolonged recession last year and this year it is expected to grow at a rate close to 3 per cent.

British Premier Theresa May said  she intended to initiate Brexit negotiations before April.

Britain’s imports from Cyprus and other EU member states could drop while UK exports could increase on improved competitiveness in the medium term, provided inflation in the UK does not pick up, the central bank said.

Brexit would not leave other major currencies, such as the euro, unaffected, as the single currency could also in turn lose ground vis-a-via third currencies.

“Such a development would affect European exports to third countries positively and mitigate effects from bilateral trade relations with the UK,” the CBC said.

Brexit could have a negative impact on economic sentiment, both in the EU and in the UK, and affect investment negatively, the bank supervisor continued. “It has to be stressed that the effects so far appear to be negligible”.

Still, “there is a big chance for an important portion of bank operations carried out in the City of London to relocate to another financial centre within the euro area,” which will have a positive impact in the single currency bloc, the central bank said. “Everything will ultimately depend on whether the exit procedure will go ahead smoothly without disagreements and of course the final agreement that will be produced”.

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