Cypriot economic activity will broadly maintain momentum in 2017and 2018. Domestic demand will remain subdued while the externalsector – led by tourism – will continue to help prop up growth.Regardless, growth will remain weak due to public sector austerity,competitive pressures on wages and disposable income, and highlevels of non-performing loans in the banking sector.
Greek and Turkish Cypriots are nearing a tentative agreementto reunify the island after more than 40 years of division, thoughdisagreements over the key issues of property rights and securityloom large. If a deal does not emerge by the end of the summer of2017, we doubt that another such window of opportunity will openup again for many years.
The Cypriot government has exited its 2013 EU/IMF bailout, butthe 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 2.9% in2017 and 2.5% in 2018, up from 2.4% for both years in our previousset of forecasts.
We have modestly revised up our average 2017 euro forecastfrom USD1.05/EUR to USD1.10/EUR, and our 2018 forecast fromUSD1.02/EUR to USD1.08/EUR.