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Cyprus Business Forecast Report Q3 2013

Cyprus Business Forecast Report Q3 2013 - new country guide report published

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2014-02-19 08:05:01 - Cyprus Business Forecast Report Q3 2013 - a new country guide report on

The break-up of Cyprus´ second-biggest bank, the ensuing collapse of the country´s large offshore financial services sector and fiscal austerity imposed on the government as a result of the EUR10bn bailout deal reached in late March, will prolong the island economy´s economic contraction for another four years. We have aggressively lowered our economic growth forecasts for Cyprus, anticipating an increase in unemployment and a freezing up of fixed investment levels.

Despite securing a EUR10bn bailout in March, we see the nominal fiscal deficit continuing to widen in 2013, before commencing a slow consolidation process. Indeed, in the absence of positive nominal GDP growth, public debt will continue to grow over the coming years.

A relatively strong mandate for Cyprus´ new president means



that the centre-right government is well placed to proceed with necessary reforms to help lead the country through its economic downturn.

However, the magnitude of the challenges ahead means that voters will become increasingly disenfranchised, limiting the president´s ability to proceed with an ambitious policy agenda.

Major Forecast Changes

We have significantly lowered our real GDP growth forecasts for Cyprus, now seeing real GDP contracting 9.0% in 2013 and 3.4% in 2014, from our previous growth forecasts of -1.4% and 0.2% respectively.

A sharp outflow of investment income in Q4 has seen the current account deficit more than double from our earlier estimates, prompting us to revise our 2013 deficit forecast to 11.5% of GDP from 4.7%.

We have raised our 2013 fiscal deficit forecast from 3.7% of GDP to 6.8%.

Key Risks To Outlook

Although the economic playing field in Cyprus has been levelled after the EUR10bn bailout in March, making accurate macroeconomic forecasting highly challenging, we believe that the risks are currently skewed to the upside, as we may be underestimating the near-term impact on real GDP growth from a collapse in imports of goods and services. In the near term, therefore, the contraction in real GDP growth may prove to be less severe than we are forecasting, since net exports could have a more positive contribution to growth, particularly if imports drop more than forecast, and exports benefit from stronger consumption levels in core eurozone economies such as Germany, as a result of economic rebalancing.

In the more medium-to-long term, we note that interest in Cyprus´ offshore hydrocarbon reserves may rise faster than we are currently factoring into our forecasts, resulting in stronger fixed investment levels and higher output of natural gas. This could also bolster export volumes, while providing a welcome source of revenues for the government to step up expenditure levels.The price of this market report covers 4 quarterly reports on this sector. This quarterly report will be downloadable instantly as a PDF document, with the 3 remaining reports delivered at regular intervals throughout the year.

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Mike King
Phone: London: +44 (0) 203 086 8600

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