Cyprus Mail
Cyprus

Rejection of budget jeopardises recovery planning, Central Bank warns

The Central Bank of Cyprus (CBC) said on Wednesday that the rejection of state budget for 2021 by the parliament was a negative development that jeopardises planning for dealing with the financial consequences of the pandemic.

In its economic bulletin for December, the CBC encourages a consensual solution that, while not endangering the consolidation course of the Cypriot economy and banking system, recognises and takes into account the fact that both households and businesses, face unprecedented financial difficulties as a result of the pandemic.

Regarding the course of GDP, the CBC noted that the introduction of new restrictive measures in mid-October and even stricter restrictions in November and December, is expected to prolong the recession.

Pointing out that recovery depends directly on finding a solution to the impasse regarding the budget, the CBC notes that the recovery is expected to begin in 2021 due to the gradual increase in domestic and foreign demand, the boost expected to be given by EU funding, but also the support of the economy by the ECB`s loose monetary policy.

The bank also notes the continuous uncertainty in the course of GDP, despite promising messages about the faster availability of the vaccine.

CBC`s forecasts have been revised upwards for 2020. In particular, a smaller contraction is envisaged due to the better-than-expected domestic demand this year, especially in the third quarter of the year, which offset the worst from the expected course of economic activity in the fourth quarter as well as in external demand, especially tourism.

In the coming years, GDP forecasts have been revised downwards, mainly due to the smaller depth of the recession in 2020 and the differences in working hypotheses in relation to the course of the pandemic.

Unemployment is expected to increase in the first months of 2021, despite restraint so far due to measures to support workers and businesses. But then this upward trend is expected to be reversed by GDP recovery and therefore, the unemployment rate is projected to return to about the same levels in 2020.

The CBC has drawn up three scenarios for the course of GDP, one basic, one mild and one unfavourable.

Specifically, based on the mild and unfavourable scenario for Cyprus, the recession for 2020 is expected to reach -5.5 per cent and -6.7 per cent respectively, while in the basic scenario it is expected to reach -6.2 per cent. The recovery for 2021 is estimated at 4.8 per cent and 1.8 per cent respectively in the mild and unfavourable scenario, while in the basic scenario it is expected to be 4.1 per cent.

Regarding the banking sector, the CBC notes that the prevailing uncertainty as well as the second wave of the pandemic negatively affects investment decisions and consequently the new lending of credit institutions to the real economy.

It is also noted that the management of old non-performing loans, but also of those that will emerge due to the pandemic, is a major challenge and should be in the immediate priorities of banks, which must be properly prepared to handle an increased number of restructurings after the end of the moratorium, halting as much as possible the increase in loans that will show delays in their repayment.

As a result of the above, the CBC expects the business plans and expectations of banking institutions to be adversely affected.

At the same time, the CBC points out that the legal framework for foreclosures must provide the necessary incentives to prevent the creation of a “culture of default”. It adds that constant changes in the legal framework do not help as they create uncertainty for foreign investors and negative reactions from rating agencies.

Despite the above challenges, the CBC adds that banking institutions maintain adequate liquidity reserves, their capital ratios are beyond the minimum required and the level of coverage of non-performing loans is close to the EU average.

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