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Cyprus Business Forecast Report Q1 2013

Cyprus Business Forecast Report Q1 2013 - new country guide report published

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2012-12-14 14:11:12 - Cyprus Business Forecast Report Q1 2013 - a new country guide report on

Opposition leader Nicos Anastasiades is the favourite to succeed current President Demetris Christofias in the February 2013 election.

He will, however, inherit a country in crisis. The strength of his mandate will depend on his ability to form a working majority with coalition partner, the Cypriot Democrat Party (DIKO).

The ´Cyprus Problem´ remains far from resolved as President Demetris Christofias ends his term in office. If Anastasiades is triumphant in the February 2013 election, dialogue could resume, though there is little to suggest a breakthrough on the horizon.

The new government will be required to manage a multi-year economic adjustment programme imposed by the ´troika´ of international lenders (EU, ECB, IMF). This is likely to involve unpopular wage and job cuts that could



cause social unrest.

The offshore gas fields discovered in the Eastern Mediterranean offer positive economic benefits that could be realised towards the end of our 10-year forecast period. At the same time, geopolitical tensions, particularly with Turkey, could delay the exploitation of these hydrocarbon resources.

Major Forecast Changes

We have lowered our forecast for government spending in 2014 and 2015, based on an expectation that the austerity package that will be agreed with the troika will be executed over several years.

We now forecast public consumption growth at -1.0% in 2014 and 0.5% in 2015.

Though there is still uncertainty over the size and format of the EU bailout, the revised estimates for the support required has prompted us to upwardly revise our public debt forecasts. We now estimate gross general government debt at 86.5% of GDP by end-2012, soaring to 110% in 2013, when the bulk of the extra borrowing is likely to occur.

Key Risks To Outlook

The delay of an agreement with the troika over the terms of the requested bailout has increased uncertainty at a time when upcoming elections already cause political risk. A last minute deal brokered with the incumbent Christofias government could have an influence on the policy direction of the incoming administration from February.

Even with financial support, the banking system remains vulnerable to more bad news concerning its Greek holdings. A further external shock could tip the financial sector over the edge, with devastating consequences for the wider economy.

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Mike King
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