31 August 2014 Sapienta Country Analysis August: Executive summary

Sapienta Country Analysis Cyprus, August 2014      

Executive summary

  • Political analysis and outlook The minority DISY-led government has faced fierce resistance to a bill to speed up foreclosures on non-performing loans (NPLs) that is due for a parliamentary vote on 5 September. There are hopes that the autumn period will see a revival of the slow-moving negotiations to resolve the Cyprus problem but we believe that there will be no significant progress until after the Turkish Cypriot presidential election in April 2015.
  • Structural reforms and natural gas The government will start discussions on a land-based LNG plant with Total and Eni-Kogas but pipeline exports to Egypt remain an option, especially if volumes are insufficient or LNG prices continue to fall. The gas services hub will be located in Limassol rather than Larnaca, while plans to upgrade the Larnaca marina have been revived. Natural gas imports have been delayed gain. Cyprus Airways’ privatization process continues.
  • Fiscal performance and forecast The government budget recorded its first two consecutive quarters of primary surpluses since 2008 in the first half of 2014, but revenue growth is still weak. The government will miss a bailout payment if the foreclosure bill is not passed but the risks to the banking system are considerably greater than the immediate risks to debt repayments. We have revised down our fiscal forecasts on the basis of the latest GDP figures.
  • Banking sector The non-passage of the foreclosure law could have very serious consequences for the banking sector. According to our calculations the additional capital requirements could be as high as €7bn and it is unlikely that such a sum could be found from EU sources, the government or institutional investors. Meanwhile, BOC’s  second-quarter results show continued stabilization, and total nominal bank deposits have continued to rise.
  • Macroeconomic trends and forecast Seasonally adjusted real GDP fell by just 0.3% over the previous period in the second quarter. There has been a strong increase in retail spending and a dramatic increase in car sales, which suggests that some of the NPLs are the result of strategic  defaults. Assuming that the foreclosure law is passed, we expect a real GDP decline of 2.7% in 2014 but massive disinvestment means that medium-term growth will average only 1.5%.