Cypriot economic activity will peak in 2017 and 2018, at a wellabove-trend pace. Domestic demand will remain subdued whilethe external sector – led by tourism – will continue to help prop upgrowth.
Over the longer term, once the economy has caught up to potential,growth will remain weak due to public sector austerity, competitivepressures on wages and disposable income and high levels of nonperformingloans in the banking sector.
Greek and Turkish Cypriots have missed their best chance to reunifythe island after more than 40 years of division, though disagreementsover the key issues of property rights and security loom large. Afterpeace talks collapsed in July 2017, we doubt that another suchwindow of opportunity will open again for many years.
The Cypriot government successfully exited its 2013 EU/IMF bailout,but the series of structural and fiscal reforms put in place under theprogramme have put the country in a position to boost private sectoractivity and reduce the public debt overhang substantially over thenext decade.
Major Forecast Changes
We have raised our real GDP growth forecast for Cyprus to 3.4%in 2017 and 2.8% in 2018, up from 2.9% and 2.5% respectively inour previous set of forecasts.
We have revised up our 2017 average exchange rate forecast fromUSD1.10/EUR to USD1.13/EUR, and for 2018 from USD1.08/EURto USD1.10/EUR.