POLITICAL ANALYSIS AND OUTLOOK. The latest gas find brings closer the moment of reckoning among political players in Cyprus and Turkey, when they must either come to a deal on energy or acknowledge that the natural gas will be left in the ground. We continue to expect Nicos Christodoulides to win the election in February 2023.

SECTORAL POLICIES, REFORMS AND ENERGY. Eni’s natural gas discovery of 2.5 tcf brings Cyprus’ estimated reserves to around one year of EU consumption and 1% of Russia’s proven reserves. However, Turkey has indicated that it will prevent natural gas extraction without a broad deal on energy. The EU is supporting a joint electricity project in the UN-monitored buffer zone.

FISCAL PERFORMANCE AND FORECAST. VAT on energy bills have been referred to the Supreme Court. The budget moved into deficit in the second quarter but we expect a surplus for the full year. Inflation and higher than expected real GDP growth will depress debt/GDP ratios and we expect the debt/GDP ratio to drop to 85% in 2022.

BANKING SECTOR. Various stakeholders are trying to prevent a takeover of Bank of Cyprus (BOC) and the bank is promising dividends in future but the stance of EU supervisors may be decisive. Hellenic Bank management faces a tough autumn with employees. New loan growth has decelerated. Non-eurozone (mainly Russian) deposits have continued to decline.

MACROECONOMIC TRENDS AND FORECAST. Real GDP growth accelerated to 6.1% in the second quarter, thanks to strong growth in tourism, retail sales, and expanding employment and real incomes. We have therefore revised up our forecast for 2022 to 4.7% but we expect a sharp slowdown to 0.8% in 2023. The trade deficit has widened sharply.

ECONOMY OF NORTHERN CYPRUS*. The inflation rate remained above 100% in July but is currently proving positive for public finances. The number of municipalities will be cut from 20 to 18. Highly liquid banks continue to buy up central bank hard-currency debt issues. Tourism and higher education are rebounding. A working group on halloumi/hellim is set to start work.

*Areas not under the effective control of the government of the Republic of Cyprus.


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