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Cyprus Business Forecast Report Q2 2010

Published by: Business Monitor International

Published: Feb. 5, 2010 - 58 Pages


Table of Contents


Executive Summary
Make Or Break For Reunification Talks
Chapter 1: Political Outlook
Political Outlook
Prospects For Reunification Rapidly Fading
Reunification talks have intensified again, with Dimitris Christofias and Mehmet Ali Talat now meeting three times
a fortnight.
Table: cypr us Political Overview
Chapter 2: Economic Outlook
Economic Introduction
Key Sectors Likely To Face Another Tough Year
All signs point to another difficult year for tourism and construction - two key drivers of Cypriot economic growth
in recent years.
Economic Activity
Slow Recovery Starts Now
The Cypriot economy continued to decline in Q309, as the lagged effects of the global crisis hit domestic
demand hard.
table: ECONOMIC ACTIVI TY
Balance Of Payments
External Imbalance Shrinks, But Will Remain High
The slump in Cypriot demand has caused import growth to plunge in the first three quarters of 2009, prompting us
to revise down our full-year target to 9.7% of GDP (from a previous 12.8%).
table: CURRENT ACCOUNT
Monetary Policy
Inflation To Remain Above Eurozone Mean
Base effects and rising oil prices sent annual inflation in Cyprus up sharply in the final two months of 2009, with
the HICP index ending the year at 1.6%.
table: MONETARY POLI CY
Fiscal Policy
Budget Deficit To Swell Further In 2010
Public finances have fallen into deficit in 2009, following two successive years of budget surpluses, as revenues
tumble on declining business activity and government spending to support the economy rises.
table: FIS CAL POLI CY
Chapter 3: 10-Year Forecast
The Cypriot Economy To 2019
Growth To Stay Positive As Economy Recovers
Though Cyprus will embark on its economic downtrend in 2009, we nonetheless hold to a positive long-term view
for the economy.
table: Long -Term Macro econom ic For ecasts
Chapter 4: Special Report
Political Risk In The Next Decade
What To Expect In 2010-2019
Table: Countr ies Facing Major Leadership Succ ession In 2010-2019
Table: Countr ies At Risk Of Major Political Uph eaval
Table: Countr ies At Risk Of Int erstate Conf lict Or Height ened Bilateral Tension
Table: Countr ies Facing Secession ist Or Autonom y Movement s, In surg enc ies, Or Civil Wars
Table: Pivot al St ates
Chapter 5: Special Report
Business Environment Outlook
TABLE : BMI BUSI NESS AND OPERATIONAL RIS K RATINGS
Institutions
TABLE : BMI LE GAL FRAMEW ORK RATINGS
Infrastructure
Market Outlook
Table: Em erg ing Europ e, Ann ual FDI Inf lows
Table: BMI Trade Rating s
TABLE : TOP EXPORT DES TINATIONS
Chapter 6: BMI Global Assumptions
Global Outlook
2010 Looking Rosier
TABLE : GLOBAL AND REGIONAL REAL GDP GROWTH
TABLE : develop ed mark et exch ang e rates
Table: Em erg ing Mark et Exch ang e Rates
TABLE : GLOBAL ASSU MPTIONS
TABLE : DEVEL OPED STATES
TABLE : EMERGING MARKETS

Abstract

The window of opportunity to reach a settlement on reunification will soon close, as elections inthe Turkish Cypriot North are likely to bring hardliner Dervis Eroglu, whose Party of National Unityfavours partition, to the negotiating table. Incumbent leaders Dimitris Christofias (Greek Cypriot)and Mehmet Ali Talat (Turkish Cypriot) have stepped up the intensity of settlement talks again,and while there is always hope when communication channels are open, it seems unlikely that anagreement can be reached before campaigning begins in the North. We expect these time pressuresand political constraints on both leaders to prevent a breakthrough before April, with thechance of finding a resolution after that much less likely. However, as we have stated previously,the status quo does not hold significant downside risks, especially in the south, which alreadyenjoys EU membership.

L atest opinion polls suggest that Dervis Eroglu will win the presidential election in Northern Cyprusin April. The nationalist party leader and prime minister has support running at 51%, comparedwith incumbent Talat’s 29%. Even allowing for statistical discrepancy and the 20% of voters stillundecided, this seems like an insurmountable challenge for Talat, unless a successful referendumon the Cyprus problem can be arranged before April - an extremely unlikely scenario, in our view.Under Eroglu, we would expect Northern Cyprus to align itself more closely with Turkey, whichincreases the risks of isolation from the international community.

Public finances have fallen into deficit in 2009, following two successive years of budget surpluses,as revenues tumble on declining business activity and government spending rises to support theeconomy. We forecast a budget deficit of 4.2% of GDP in 2009, rising to 4.6% of GDP in 2010 asunemployment remains high and growth sluggish. New measures to plug the budget gap will havesome impact going forward, though we expect the fiscal shortfall to remain above 3% until 2012at the earliest.

Cyprus continues to hold a status as a regional financial hub, due to its strong rule of law, eurozonemembership and extremely low corporate tax rate (10%). However, investment activity inCyprus will continue to be weighed down by the island’s political problems and economic imbalances,which are a major deterrent for investors. In addition, the traditionally important sector oftourism is suffering from a decline in competitiveness relative to other popular destinations, andfaces another very difficult year in 2010. The banking sector - which has been developing rapidlyin recent years - has weathered the financial storm so far, but will continue to come under strainfrom external risks, particular from neighbouring Greece.

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