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Cyprus Country Risk Reports Q2 2015

Cyprus Country Risk Reports Q2 2015

Core Views

Cyprus is past the worst of its brutal recession. Nonetheless, we do not forecast a full recovery for several years, as credit growth remains impaired, public austerity is deepening, and the internal devaluation process is keeping a lid on nominal and real wages.

Although the Cypriot government's fiscal consolidation plan has begun to bear fruit, with a reduced deficit, a budget surplus is unlikely to be posted any time soon. With slow economic growth ahead and chronic budget deficits, Cyprus's debt sustainability may again be called into question at some point in the next few years.

Talks to reunify the island have broken down once again. While both sides of the dispute still appear to be far apart on the terms of any potential settlement, we believe that negotiations on the 40-year-old 'Cyprus problem' are reaching a crucial phase.

Major Forecast Changes

We have raised our 2015 real GDP growth forecast to 0.4% from 0.0%.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
External Risks Increasing In 2015
We envisage continued stability in Cypriot domestic politics in 2015. However, external risks from Greek political turmoil and Turkish
hydrocarbon claims to offshore natural gas could interfere with this stability.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Cyprus Problem And The Economy Are 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, 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
SWOT Analysis
BMI Economic Risk Index
Economic Activity
External Headwinds To Weigh On Recovery
The worst of the Cypriot recession is over, and the economy is likely to return to growth in 2015, led by private consumption. Real
GDP expansion is nonetheless likely to remain constrained by weakening external demand, and increasing headwinds from the Greek
political crisis and Russia's economic collapse.
TABLE: GDP By Expenditure
TABLE: Nominal GDP Revisions , 2013 Data
Fiscal Policy
Further Fiscal Consolidation Ahead
With the political backdrop likely to remain stable, and the economy slowly turning the corner, we expect the government to make further
progress with consolidating its fiscal accounts in 2015-2016. We forecast government debt-to-GDP to peak in 2015 at 109%, falling
gradually thereafter.
TABLE: Fiscal Polic y
Balance Of Payments
External Adjustment Nearly Complete
The adjustment in Cyprus' external accounts is nearly complete, following the 2008-2009 economic crisis and the 2013 bailout. While
the stock of net external liabilities is one of the highest in the world as a proportion of GDP, Cyprus is likely to avoid an external crisis in
the near future due to its cooperation with the Troika of bailout lenders and capital controls.
TABLE: Curent Account
Regional Monetary Policy
Q&A On ECB QE
TABLE: European Central Bank – Capital Key for Eurozone Members
Cyprus Q2 2015
Chapter 3: 10-Year Forecast
The Cypriot Economy To 2024
Long Road To Recovery
Cyprus will continue to experience weak economic growth and a painful structural adjustment process over the coming years that will
leave a lasting mark on both the domestic consumer and corporate sectors. Although there is scope for stronger growth to return to
the island towards the end of our 10-year forecast period, as the economy enjoys a more solid fundamental picture following a painful
adjustment process, as well as benefitting from the emergence of new industries, such as offshore oil and gas, we believe that the
wealth destruction along the way will outweigh such benefits through to 2024.
TABLE: Long -Ter m Macroecono mic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
tABLE: Developed States – Labour Mar ket Ris k
Table : Developed States – Logistics Ris k
Table : Developed States – Cri me And Security Ris k
table : Developed States – Trade And Invest ment Ris k
Chapter 5: BMI Global Assumptions
Global Outlook
New Era For Oil
Table : Global Assu mptions
Table : Developed States , Real GDP Growt H, %
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table : Emerging Mar kets , Real GDP Growth , %

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