21 December 2018 Executive Summary Sapienta Country Analysis Cyprus

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Overview 21 December 2018

  • Political analysis and outlook. We do not expect negotiations to solve the Cyprus problem to resume before September/October 2019 at the earliest, which increases the risk of them failing. A two-state solution, which might be the desired end-game for some parties, would be unlikely to gain Turkish Cypriot assent, as it would leave them out of EU structures. Meanwhile, regional dynamics are changing in ways that bring both opportunities and risks.

  • Structural reforms and natural gas. An inter-state agreement with Cyprus, Greece and Israel marks the first step in the proposed East Med pipeline but the economic challenges to building it remain extremely high. Paediatricians say they will not take part in the new National Health System (GESY). The government is making another attempt at local government reform and has the support of the opposition Democratic Party (DIKO).
  • Fiscal performance and forecast. New data confirm €1.9bn in debt repayments due in both 2019 and 2020 but the government already has enough cash to meet all of its obligations in 2019. Parliament has passed the 2019 budget, providing for a general government budget surplus of 3% of GDP and a primary surplus of 5.5% of GDP. We expect the debt/GDP ratio to drop below 80% of GDP in 2022.
  • Banking sector. Hellenic Bank’s results show that its balance sheet grew by €9.2bn as a result of absorbing most of the “good” part of the Cyprus Cooperative Bank (co-op). Its loan market share is now 21%. The bank’s exposure to household loans has increased in absolute terms but its non-performing exposure (NPE) ratio has declined. The ESTIA state subsidy scheme for qualifying non-performing loans (NPLs) will be rolled out in 2019.
  • Macroeconomic trends and forecast. The third-quarter real GDP growth rate was revised up slightly but growth slowed overall, as the deceleration in household consumption was only partly offset by investment in construction. Employment continues to expand but has come off its peak. We expect real GDP growth of 2.8% in 2019, after an estimated 3.8% in 2018. In northern Cyprus, inflation and tourism arrivals from Turkey have benefited from an appreciation of the Turkish lira.
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