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Coronavirus: Economy expected to shrink by up to 10 per cent

Unemployment is expected to reach 9 per cent

The economy this year is expected to contract by up to almost 10 per cent, the finance ministry said on Monday, as the government was looking to raise cash via a bond issuance to tackle the economic fallout from the coronavirus situation.

In a statement, the finance ministry’s Public Debt Management Office (PDMO) said it was forecasting GDP to decline by between 5 to 9.7 per cent.

Unemployment is expected to rise to 9 per cent, compared to 7.1 per cent in 2019.

But it added the caveat: “It should be noted that the current situation involves considerable uncertainty and the current estimated impact of Covid-19 will be subject to reassessment and adjustment over time. There can be no assurance that the impact of Covid-19 will be as described above, and the negative impact may exceed the current estimations set out above.”

At the same time, the PDMO said the government has revised its potential financing needs for 2020, with up to €3.25bn in extra borrowing.

“Given…the high degree of uncertainty and the persistency of Covid-19, giving rise to the question of how long the disease is going to last and what will be its impact on the international economy as well as on international markets, the Republic of Cyprus decided to revise its annual funding plan…” the PDMO said.

This would consist of drawing up to an additional €2bn in European Government Bonds (Emtn), plus up to €1.25bn in new domestic 12-month treasury bills.

It’s understood these are tentative, rather than definitive, financing provisions.

On public finances, the PDMO said the budget balance of the government “is projected to reach a deficit of about 4 per cent of GDP in 2020, stemming from the impact of the pandemic on economic activity impacting both revenue and expenditure, as well as from the temporary fiscal impact brought by the related measures.”

“However, it should be emphasised that the Republic of Cyprus is dealing with this crisis from a very strong position on its business cycle and from a comfortable fiscal position. The Republic of Cyprus has been operating at close to potential output in the past few years, with sustainable fiscal surpluses to cushion the current crisis.”

Regarding the medium-term outlook, the PDMO said that due to the high degree of uncertainty, “it would not be possible to provide estimations for years 2021 onwards. We expect though that the economy will rebound and follow a positive growth path, accompanied by positive developments on the fiscal front.”

On the same day, and in a separate development, Cyprus announced its intention to tap international money markets in a bid to boost its cash reserves amid the coronavirus pandemic. It will be doing so through issuance of a 7-year and a 30-year euro-denominated bond.

“The deal comprises a EUR benchmark April 2027 fixed rate tranche and a EUR benchmark April 2050 fixed rate tranche,” a press release read.

The issue is expected to be launched in the near future subject to market conditions.

 



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