Strong Growth Prospects for Cyprus: 2017 Economic Update


Cyprus is currently undergoing a broad based recovery, with assurance and stability returning after three years of ruthless reforms and austerity measures to stabilise the financial sector and refine public capital. Economic growth on the island is now driven by stable consumption and a vibrant tourism sector. Let’s look into more depth at each area.

Recapitalised Banking Sector

A successfully recapitalised banking sector passed rigorous ECB testing regime and found a stable footing after the chaos of the 2013 bail-in. Liquidity & solvency in the Cyprus banking system have improved considerably and deposits grew by over €3 billion in 2016 last year.

 

Successive Ratings Upgrades

Cyprus’ speedy return to global markets was a positive step towards the restoration of confidence and credibility in the eyes of the international business community. Fruitful bond issues over the recovery period rose over €3 billion and consecutive upgrades by international ratings agencies are contributing factors to stronger investor interest. Cyprus returned to growth from 2015, showing, on average, a growth rate of 1.7%in 2015 and 2.9% in 2016 according to the Cyprus Ministry of Finance; who are also predicting similar figures for the end of quarter 4 this year.

 

Falling Unemployment Figures

Unemployment is set to continue its decline on the island, although tackling youth and recent graduate unemployment continues to be a substantial task. The unemployment rate first started to fall in the first half of 2015, averaging 15% in that year and dropped to 13% in 2016. The EC predicts further decline as current forecasts for Q4 2017 are currently 12%.

 

New Incentives

Recently approved tax measures have further improved the long-established Cypriot tax framework, making it more efficient and transparent. The new measures are fully compliant with EU Directives, and support the promotion of economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing.

Tax incentives for intellectual property, innovative small and medium start-ups were also introduced earlier this year which will further improve Cyprus’ competitiveness as a location for multinationals seeking to do business within the Eurozone.

 

The Negatives

It will be a long time before risks relating to high levels of non-performing loans (NPLs) and public debt disappear entirely, and these two issues remain a substantial problem for Cyprus in 2017, however these numbers are declining; albeit slowly. The icing on the cake for the economy during this pre-election year will be if parliament passes long overdue reforms to offer appropriate support for investors and to introduce performance incentives within the public sector.


 

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