Cyprus Mail

“Patient survives operation, wound still hurts”, Central Bank official says

When describing the state of an economy, painting the picture with medical terms may sometimes help a keynote speaker convey a more accurate idea to an audience than resorting to the phraseology of economists, which often sounds abstract, especially to laymen.

Doing so in front of an audience comprised of highly educated economists may also serve another purpose: to raise awareness of possible risks and the urgency of the situation.

This is what George Kyriacou, director of economic analysis and research at the Central Bank of Cyprus may have had in mind when he gave an audience of economists his “medical report” on the Cypriot economy at a panel discussion organised by the Cyprus Economic Society on Thursday. The event was titled: “The Cyprus Economy Panel: Outlook for 2017-2018 And the Economic Challenges Going Forward”

Cyprus, the patient, suffered “a deep and almost fatal wound” four years ago, when its second largest bank went out of business and depositors at the largest bank saw close to half of their uninsured deposits turned into equity, he said.
“A major surgery was undertaken which was successful and the patient survived,” Kyriacou continued. “The wound still hurts, risks remain, but recovery is setting in with a long recuperation period”.

With the reform process stalled, the economy “is still not out of the woods,” he added: several risk factors remain, including the high stock of non-performing loans in the banking system — roughly half the banks’ portfolio — which is undermining growth; non-financial corporations — in the absence of alternative ways to get financing — and households are heavily indebted; government debt is also high and projected to drop at a slow rate; the unemployment rate remains high and the sovereign credit rating is in the non-investment grade. At least, the external environment is “not unfavourable” and economic sentiment returned to pre-crisis levels.

And there are also a number of other downside risks which may also be considered upside risks, Kyriacou continued. Brexit, is one of them as it could negatively affect the economy of the UK, Cyprus’s largest source of incoming tourism, but also trigger a relocation of large financial companies to Cyprus.

The new US president Donald Trump, who will be sworn in on Friday, is also a risk factor which can have a positive or a negative impact on the world’s economy, including that of Cyprus.

On top come regional risks, which currently continue to have a positive impact on the economy, something which could change anytime, and the possible reunification of Cyprus, which, depending on the terms that the two communities will agree, may help or harm the economy, Kyriacou said.

The therapy applied to treat Cyprus’s condition is already paying off as it allowed it to recover some of the lost ground in terms of competitiveness, depositor confidence and, with public finances and growth consolidating, lower yields for government bonds, which are already lower than those of Portugal, the third euro area member to request a bailout, Kyriacou said.

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