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New Market Report: Cyprus Business Forecast Report Q1 2013

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2012-12-25 13:21:52 - New Country Reports market report from Business Monitor International: "Cyprus Business Forecast Report Q1 2013"

Core Views

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.

Full Report Details at
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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.

Partial Table of Contents:

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Anastasiades Clear Favourite For President
- As the February presidential election approaches, opposition DISY leader Nicos Anastasiades remains the clear favourite to succeed Demetris Christofias. If victorious, Anastasiades will inherit a host of severe challenges, particularly with regard to the economy and foreign policy. As the likely president, we expect the DISY candidate to shift policy direction towards more business friendly policies, despite resistance from unions. Social unrest represents a key domestic risk to short-term political stability, while the ongoing 'Cyprus Problem' and rising tensions with Turkey over hydrocarbon exploration in the Eastern Mediterranean represent longer-term risks.
Long-Term Political Outlook
'Cyprus Problem', Economy The Dominant Issues
- Cyprus celebrated 50 years of independence on October 1 2010, yet the island remains divided along ethnic Greek and ethnic Turkish lines. Settlement talks between the leaders of the ethnic Greek South and ethnic Turkish North have been ongoing for several years with little in the way of progress. The window of opportunity for finding a resolution is closing. Economic policy will also be at the forefront of discussion in the coming years, as the government struggles to bring the fiscal deficit within eurozone limits, while protecting the economy from another severe recession. In both cases, the downside risks to long-term stability are limited by strong democratic institutions operating within the EU framework.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Still Seeking The Bottom
- The economic outlook remains bleak in Cyprus. The recession deepened in H112 and shows little sign of abating in the second half of the year. Amid a slump in domestic demand and the prospect of several years of fiscal austerity, the country's economic growth will remain subdued over the next five years. We hold our forecast for real GDP to contract by 1.7% in 2012 and 0.4% in 2013, with a return to moderate growth (1.1%) in 2014. Near-term risks are weighted to the downside, coming especially from Greece and uncertainty over dealings with the troika.
Austerity Is The Only Certainty
- We forecast a budget shortfall of 5.1% of GDP in 2012. Although this is down from 6.5% of GDP deficit in 2011, it is double the government's original target for the year. We expect a programme of fiscal consolidation to begin in earnest under a new government in 2013. However, with significant external financial support required to recapitalise banks and finance government deficits, we expect public debt to soar to 110% of GDP by end-2013.
Monetary Policy
No Changes To Inflation Outlook

Full Table of Contents is available at:

About Business Monitor International

Business Monitor International (BMI) offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities, across 175 markets. BMI offers three main areas of expertise: Country Risk BMI's country risk and macroeconomic forecast portfolio includes weekly financial market reports, monthly regional Monitors, and in-depth quarterly Business Forecast Reports. Industry Analysis BMI covers a total of 17 industry verticals through a portfolio of services, including in-depth quarterly Country Forecast Reports. View more research from Business Monitor International at

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