2013-12-13 14:14:49 - New Country Reports research report from Business Monitor International is now available from Fast Market Research
Cyprus' government will remain firmly committed to the terms of its EUR10bn bailout programme, which could result in a public backlash over the coming years. However, we believe that future negotiations with creditors could prove to be more confrontational in a bid to secure the best terms possible and limit a potential drop in popularity.
We see a rapid adjustment in the fiscal dynamics, forecasting the nominal budget deficit to fall from 6.4% of GDP in 2012 to 4.3% in 2013 and continue narrowing to 3.2% in 2014. Further commitment to EU-prescribed austerity measures will be key to ensuring sustain -able debt management given that we see the general government debt pile rising above 100% of GDP in 2013.
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Early indications of the severity of Cyprus' economic adjustment following the country's banking sector crisis in early 2013 reaffirm our view that the economy is heading towards a period of major structural adjustment. We continue to see several years of negative real private consumption, government expenditure and fixed invest -ment growth, which will keep the economy firmly in deep recession until 2016/2017.
Major Forecast changes
We have revised our 2013 real GDP growth forecast go -7.1% from -9.0% and see -3.6% real GDP growth in 2014, from our previous forecast of -3.4%.
Bigger-than-expected spending cuts have significantly reduced the budget deficit and prompted us to revise our nominal fiscal balance forecast to -4.3% of GDP in 2013 and -3.2% in 2014, from -6.8% and -6.5% respectively.
We see a sharper adjustment in the current account in 2013, now forecasting a deficit of 3.9% of GDP, from our previous forecast of -7.0%, as imports of goods fall at a faster rate than we had previ -ously assumed.
Key risks to outlook
The near-term outlook is somewhat uncertain as we believe that the Q213 GDP data may not accurately reflect the full impact of Cyprus' banking sector crisis and compliance with rigorous fiscal austerity and structural reform to qualify for financial aid. This means that the risks are likely to the downside, as leading indicators have continued to deteriorate into the third quarter of 2013.
Deteriorating social conditions will test the government's resolve to adhere to prescribed fiscal consolidation programmes over the coming years. This could significantly derail ongoing efforts to rein in spending in the absence of meaningful nominal GDP growth.
Cyprus is currently undergoing a sharp balance of payments correc -tion, after narrowly avoiding a collapse of its banking sector earlier in 2013. This means that even under our revised forecast scenario, we may still be underestimating the rate of economic rebalancing, which could force a narrower current account shortfall in 2013 and 2014, if not an outright shift into a surplus, as seen during the large internal devaluations in the Baltic States in 2009.
Partial Table of Contents:
Major Forecast changes
Key risks to outlook
chapter 1: political outlook
BMi political risk ratings
Government to take a More Hard-Line approach in Future Bailout Deals
- Cyprus' government will remain firmly committed to the terms of its EUR10bn bailout programme, which could result in a public backlash over the coming years. However, we believe that future negotiations with creditors could prove to be more confrontational in a bid to secure the best terms possible and limit a potential drop in popularity.
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Long- term political outlook
'cyprus problem' and economy remain 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 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 deal with major fiscal austerity and an economic depression. 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
BMi economic risk ratings
Structural Adjustment Affirms Negative Growth Outlook
- Early indications of the severity of Cyprus' economic adjustment following the country's banking sector crisis in early 2013 reaffirm our view that the economy is heading towards a period of major structural adjustment. We continue to see several years of negative real private consumption, government expenditure and fixed investment growth, which will keep the economy firmly in deep recession until 2016/2017.
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austerity Drive points to improving public Finances
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Balance of payments
Deleveraging paves Way For sharp current account adjustment
Full Table of Contents is available at:
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