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Cyprus Country Risk Report Q2 2016

Cyprus Country Risk Report Q2 2016

Core Views

Cyprus is emerging from a prolonged recession. Regardless, theeconomy will continue to be challenged by a weak external environment,public sector austerity, competitive pressures on wages anddisposable income, and high levels of non-performing loans in thebanking sector.

Negotiations between Greek and Turkish Cypriots on the 40-year-old‘Cyprus problem’ are reaching a crucial phase. The odds of a dealto reunify the island are higher now than they have been since thelast major peace effort ended in 2004.

The Cypriot government’s adherence to the terms of the 2013 bailoutprogramme and a series of structural and fiscal reforms have put thecountry in a position to reduce its public debst overhang substantiallyover the next decade.

Major Forecast Change

We have revised up our forecast for real GDP growth in 2015 to1.3% from 0.4% as a result of strong economic data in the first threequarters of 2015 and a revision to historic data series. We continueto see a strong acceleration in 2016 and 2017, to 1.8% and 2.2%real GDP growth, respectively.


Executive Summary
Core Views
Major Forecast Change
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Recovery To Continue As Key Sectors Rebound
Cyprus's recovery from recession will continue in 2016 and 2017 as consumption picks up, the government eases fiscal policy, and a
resurgence in the crucial tourism, real estate, and financial sectors boosts activity across the economy.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal And Debt Outlook
Bailout Programme To End In 2016, But Legacy Will Last
Cyprus is set to exit its three-year, EUR10bn bailout programme in 2016, emerging with a slimmer public sector and more disciplined
fiscal dynamics. We believe that the threat of higher interest rates amid an already high debt load will ensure that the government
remains fiscally prudent post-bailout in any case, but a precautionary supervision agreement with the EC/IMF/ECB looks likely.
Structural Fiscal Position
TABLE: GENERAL GOVERNMENT EXPENDITURE AND REVENUE BREAKDOWN
TABLE: FISCAL POLICY
External Trade And Investment Outlook
Smaller, More Sustainable External Deficits Ahead
Cyprus' external sector has adjusted significantly since 2008, with the current account deficit narrowing sharply. While weak domestic
demand conditions have been the main reason for this shift, we expect the dynamics to become healthier in the next few years
particularly due to the relatively weak euro, improvement in labour competitiveness, low oil prices, and a strengthening of tourism and
financial services exports.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS IMPORTS IN 2014
TABLE: TOP 5 GOODS EXPORTS IN 2014
Regional Monetary Policy
ECB: Underwhelming, But Still Substantial Easing
The European Central Bank (ECB)'s monetary policy easing on December 3 disappointed markets in terms of its depth and breadth.
However, strengthening economic and inflation conditions in the eurozone suggest that the ECB may be better off holding fire, and in
our view, the easing is still fairly significant despite disappointment on the headline figures.
Chapter 2: 10-Year Forecast
The Cypriot Economy To 2025
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 the domestic consumer and corporate sector alike.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Reunification Deal Takes Shape As Crunch Time Approaches
Cypriot reunification is closer than ever, but three key issues – a mutually acceptable government framework, property and territory, and
the role of Turkey – remain key obstacles to a peace deal. We expect a resolution to the current peace process, either way, by mid-
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Cyprus Problem, Economy The Dominant Issues
Cyprus has been divided along ethnic Greek and ethnic Turkish lines for more than 40 years. 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, but there is
cause for cautious optimism on a permanent accord being reached in the near future. 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 the aftermath of an economic
depression. Nonetheless, the downside risks to long-term stability are limited by strong democratic institutions operating within the EU
framework.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: DEVELOPED STATES – LABOUR MARKET RISK
TABLE: DEVELOPED STATES – LOGISTICS RISK
TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK
TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: CYPRUS – MACROECONOMIC DATA & FORECASTS

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