30 November 2018 Executive Summary Sapienta Country Analysis Cyprus

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POLITICAL ANALYSIS AND OUTLOOK: There are few indications that negotiations to solve the Cyprus problem will resume in the coming weeks or months. Questions are being raised about any form of settlement that involves power-sharing and incentives to get started are weak. Early natural gas drilling results could change dynamics but we believe that some Greek Cypriot players may want to bolster geopolitical partnerships first before coming to any deals.

STRUCTURAL REFORMS AND NATURAL GAS: Preliminary results of Exxon’s first well in Block 10 could be known in the first few days of January and Turkey still intends to drill in the Republic of Cyprus Exclusive Economic Zone (EEZ). Political agreements have reportedly been made on the East Med pipeline, although costs and schedules are highly ambitious. Private hospitals and doctors continue to raise concerns about the forthcoming National Health System (GESY).

FISCAL PERFORMANCE AND FORECAST: Cyprus will undergo another EU in-depth review in 2019, partly owing to the impact on statistics of special purpose entities (SPEs), but we expect the outcome to show an improvement relative to 2018. Revenue growth remains high but has been slowing. The debt/GDP ratio should drop back below 100% of GDP in 2019.

BANKING SECTOR: Bank of Cyprus reported a small profit in the third quarter and does not appear to need any equity capital in the short term. The bank expects to see a significant reduction in non-performing exposures (NPEs) after the Helix loan-sale is finalized. Parliamentarians are pushing for state support for even performing loans, which could prevent an increase in already high housing NPEs. Non-performing loans (NPLs) in the Turkish Cypriot banking system remain low but continue to rise in absolute terms.

MACROECONOMIC TRENDS AND FORECAST: Real GDP slowed slightly in the third quarter partly owing to tourism and retail sales. The current-account deficit narrowed in January-June largely owing to strong re-exports, while available data suggest that foreign direct investment in real estate rose in the same period. We have kept our real GDP forecast unchanged at 3.8% in 2018 and 2.6% in 2019. The weak lira has hit tourism and inflation in northern Cyprus.

For more information about Sapienta Country Analysis Cyprus and a sample visit https://sapientaeconomics.com/country-analysis-cyprus/

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