2013-03-14 10:39:22 - New Country Reports market report from Business Monitor International: "Cyprus Business Forecast Report Q2 2013"

Core Views

Despite strong scepticism from Berlin over a bailout for Cyprus, we expect a deal to be forthcoming after the country's presidential election in February. However, any aid package will likely come attached with stringent conditionalities, given the politically contentious nature of a fifth euro area bailout ahead of Germany's general election in September.

The Cypriot economy is on course for another year of negative growth in 2013, making the current economic contraction more severe than during the Global Financial Crisis of 2008/2009. Major fiscal austerity and a collapse in final consumption as well as fixed investment will remain the dominant macroeconomic themes in Cyprus. Faced with the prospect of stringent austerity measures as part of a prospective bailout, or alternatively

a meltdown of a financial sector several times the size of the EUR18.0bn economy, there is little reason for optimism.


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Cyprus will undergo a period of extensive economic rebalancing over the coming years, as its current balance of payments dynamics no longer seem sustainable. With a period of deleveraging likely to take place in the near future, Cyprus' external imbalances are likely to correct over the next few years. We caution, however, that a precarious net international investment position could trigger a much sharper adjustment in the event that bailout terms are not agreed in the next few months.

We expect centre-right DISY candidate Nicos Anastasiades to win the upcoming presidential election in Cyprus on February 17. Although this favours the island's chances of securing a much-needed bailout in the following month, the incoming administration will need to deal with highly demanding terms to qualify for financial aid. Should opposition in Germany to an eventual bailout not soften in the coming months, recently proposed terms could prove too much for the incoming Cypriot government to push through parliament, threatening to destabilise Cyprus both economically, and politically.

Major Forecast Changes

We have revised our real GDP growth forecast for Cyprus from -1.7% to -2.0% in 2012 and from -0.5% to -1.5% in 2013.

We have raised our estimate for Cyprus' current account deficit in 2012 to -5.2% of GDP from -3.2% previously. In 2013, however, we see the deficit narrowing more rapidly to -4.7% from our previous forecast for a -5.8% of GDP shortfall.

We have raised Cyprus' fiscal deficit forecast for 2012 to 6.6% of GDP from 5.1% previously, and see the funding gap shrinking more gradually to 5.2% of GDP in 2013, from our previous forecast of a 3.7% of GDP deficit.

Key Risks To Outlook

While we remain confident that Cyprus will receive a bailout following its election in February, there are clear risks to this view. Should an electoral upset in Cyprus occur, and Anastasiades cannot secure the presidency in a second-round run-off on February 28, the prospect of a more populist government could derail negotiations with Berlin and the troika.

We caution that in the event of a bailout for Cyprus not being secured in spring 2013, a meltdown of the financial sector and subsequent expulsion from the eurozone could trigger a longer-term economic depression, which will take years to unwind and will leave an even more lasting effect on household spending levels for several years to come.

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
New Government To Face Existential Challenges
- We expect centre-right DISY candidate Nicos Anastasiades to win the upcoming presidential election in Cyprus on February 17. Although this favours the island's chances of securing a much-needed bailout in the following month, the incoming administration will need to deal with highly demanding terms to qualify for financial aid. Should opposition in Germany to an eventual bailout not soften in the coming months, recently proposed terms could prove too much for the incoming Cypriot government to push through parliament, threatening to destabilise Cyprus both economically, and politically.
TABLE: POLITICAL OVERVIEW
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 going on for several years with little in the way of progress, and 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
Meaningful Recovery Remains A Long Way Off
- Although arguably past its trough, there are currently no signs that the Cypriot economy is turning a corner. With fiscal austerity likely to dominate government policy in the coming years and households facing high unemployment, we revise our economic growth forecasts, now expecting a 1.5% contraction in real GDP in 2013 (up from our previous forecast for a 0.5% contraction this year).
TABLE: GDP BY EXPENDITURE
TABLE: ECONOMIC ACTIVITY
Public Debt
Bailout Deal To Follow February Elections
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