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NPLs expected to increase in 2021, no ‘magic solutions’

Central bank governor Constantinos Herodotou

Central Bank Governor Constantinos Herodotou said on Tuesday he expected a rise in non-performing loans in 2021 because of the effects of the coronavirus crisis, but with proper management the economy could emerge stronger than before.

Speaking through teleconferencing at the 10th Nicosia Economic Congress, Herodotou also presented the central bank’s scenarios on the course of the economy, which could contract by 9.9 per cent this year under extreme conditions that include a second wave of the virus.

The governor said the scenarios should not be viewed as forecasts due to the prevailing uncertainty.

The CBC’s basic scenario sees a 7.3 per cent drop in GDP this year and 5.5 per cent growth in 2021. For 2022, the CBC sees growth at 4.1 per cent, under the same scenario.

The good scenario sees a 5.6 per cent contraction.

Herodotou said unemployment could rise to 8.2 per cent in 2020 under the basic scenario but its rate of increase would be significantly lower than the contraction of the GDP due to the government measures.

Unemployment should take a downward trend in 2021, when it is expected to drop to 7.2 per cent and continue down to 6.5 per cent in 2022.

The governor said bad debts were not expected to grow this year because of the loan repayment holiday in effect from March until the end of the year.

“Of course, a rise in NPLs is expected in 2021,” he said, but on the positive side, because of the country’s excellent epidemiological profile, restrictions have been lifted while the repayment holiday was still in effect.

“In other words, the recovery of income by households and businesses has started while the instalment suspension is in effect,” Herodotou said.

The governor warned that people should manage the recovery of revenues properly since the suspension ended at the beginning of 2021.

“Let us not forget the next day because if we manage it correctly and we are properly prepared for 2021, I really believe our economy can even emerge stronger and do very well in 2021.”

Finance Minister Constantinos Petrides described the crisis as the biggest since the 1929 depression.

He said the government implemented an unprecedented intervention by Cyprus standards through a state support programme that reached €1.2bn or around 8 per cent of GDP plus liquidity measures worth around 10 per cent of GDP.

“What we succeeded in doing was to afford a robust comprehensive social protection net but also prospects to businesses so that they could breath,” he said. “From the onset we decided that the state should absorb a large part, or the biggest part, of the tremors caused by the lockdown.”

The minister said the state’s ability to react immediately was due to the prudent policy followed since 2013 – “the policy of creating reserves and fiscal cushion that allowed us to act.”

Petrides said he was not a supporter of magic solutions.

“Those who tried to implement them entered dangerous paths.”

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