34.7 C
Monday, July 22, 2024

Encouraging news from the Commission: Sees 3.1% growth in 2021 and 3.8% in 2022

Must read

Encouraging news from the Commission: Sees 3.1% growth in 2021 and 3.8% in 2022

The Commission for the Cypriot Economy sees growth of 3.2% in 2021 and 3.8% in 2022 in the 10th report of the post-program supervision for Cyprus (PPS) published on Wednesday, noting, however, that the fiscal outlook is surrounded by significant risks.

The report summarizes the main findings from the tenth monitoring mission which took place from 8-18 March 2021.

Given the travel restrictions related to COVID-19, the Commission notes that the mission was carried out in digital form, via video and by teleconferences with Commission officials, in cooperation with staff of the European Central Bank (ECB).

Several online meetings were held with the Cypriot authorities, the major banks and the companies that received credit. European Stability Mechanism (ESM) staff participated in teleconferences on aspects related to the ESM Early Warning System. The staff of the International Monetary Fund (IMF) has also acceded to Article IV.

In detail, the report states that after the sharp contraction of economic activity in 2020 due to the pandemic and the consequent lockdown measures, with the tourism sector burdened, a gradual recovery is expected in 2021 and 2022.

Real GDP shrank by 5.1% in 2020. Domestic demand, with the help of fiscal measures, was more resilient than external demand.

Tourism fell sharply in 2020 with a decrease in revenues of 85.4%. In 2021, a moderate recovery is expected, with GDP expected to increase by 3.1%, as the renewed lockdown at the beginning of the year and in April has reduced the short-term growth prospects of the Cypriot economy and travel restrictions are supposed to be in place them until the vaccination rate increases.

In 2022, the recovery is projected to accelerate to 3.8%, mainly due to growing domestic demand and a small positive contribution from net exports.

The recovery and resilience plan is expected to have a gradual positive impact on the economy by the end of 2021 with the implementation of reforms and investments and ultimately to strengthen the country's growth potential in the medium term.

The report also notes that unemployment rose only moderately in 2020 to 7.6% from 7.1% in 2019, with the help of income support measures to maintain employment, which were partly financed by loans under SURE ( support for mitigating the risks of unemployment in the event of an emergency).

In 2022, unemployment is expected to fall to 7.2%.

The decline in external demand led to a significant increase in the current account deficit from 6.3% of GDP in 2019 to 11.9% of GDP in 2020, with only a small improvement projected on the forecast horizon. This will further aggravate the net international investment position of Cyprus.

Inflation became negative in 2020 (-1.1%), decreased by energy prices, but is expected to increase in 2021 and 2022.

The negative risks to growth prospects are significant, especially in the course of the pandemic. On the positive side, faster than expected progress on the EU vaccination campaign could be a significant benefit for the tourism sector in Cyprus.

The report stresses that Cyprus's state funding and repayment capacity remain sound.

Throughout 2020, the government has created a significant cash reserve to provide the necessary firepower to fight the pandemic, support the economy and deal with potential adverse scenarios.

The liquidity position of Cyprus is projected to cover the financing needs of the current year. Through its bond issues, Cyprus has demonstrated stable market access and favorable financing conditions – supported by the accommodative monetary stance in the euro area.

With a zero coupon rate, the most recent international issue is indicative (placement of 5-year bonds worth 1 billion euros, which took place in February 2021).

In the future, gross funding needs are expected to decrease over the next two years.

In addition, the government debt ratio is projected to decline amid the economic recovery as the government plans to use some of the accumulated liquidity to meet its upcoming financing needs.

However, for Cyprus, the debt dynamics remain sensitive to the instability of the macroeconomic environment and external developments.

In addition, it is recorded that macroeconomic developments and the political response to the COVID-19 crisis have strongly affected the public finances of Cyprus in 2020, but the fiscal situation is projected to improve in 2021 and 2022.

In 2020, a public deficit of 5.7% of GDP was reported, followed by a surplus of 1.5% of GDP in 2019. This sharp deterioration is explained by lower general government revenues and higher general government expenditures.

Revenues fell by about 3% of GDP in 2020, mainly due to lower collection of various categories of taxes, especially VAT.

Meanwhile, spending increased by 4.4% of GDP in 2020, reflecting the introduction of support measures to combat the pandemic and mitigate the negative socio-economic impact of the economic downturn.

The budgetary impact of the implemented support schemes amounted to 3.6% of GDP in 2020. For the year 2021, additional measures have been adopted with an estimated budgetary impact of 3.4% of GDP.

While the debt-to-GDP ratio increased significantly in 2020 to 118.2% of GDP, it is expected to take a downward trend this year due to the economic recovery, the decline in cash reserves that had risen significantly in 2020 and improved fiscal performance.

The financial perspective is surrounded by significant risks, which are mainly negative and concern the future development of the COVID-19 pandemic and its adverse effects on the recovery, which may require further budget support.

The continuation of the government's fiscal policy to deal with the crisis is vital and the early withdrawal of fiscal measures could negatively affect the economic situation, the Commission warns.

In addition, any liabilities – especially those related to the financial sector – could be met, with further negative budgetary implications. Higher than estimated costs associated with the recently reformed National Health System could also affect the fiscal outlook in the medium and long term, the institutions note.

Finally, it is noted that banks have made further progress in reducing non-performing loans (NPLs), but significant challenges remain in the banking sector.

Despite the pandemic, the MES index fell by 10 percentage points throughout 2020 (reaching 17.7% at the end of the year) due to asset sales and write-offs. Banks have sufficient liquidity and capital reserves remain stable, with some variation between institutions.

However, the transfer of old NPLs outside the banking sector and increased forecasts affected profitability, which was already under pressure before the pandemic. About 50% of the loans granted benefited from the first moratorium on loan repayments – representing the highest share in the EU.

Prolonged financial problems for businesses and households could pose a threat to debt repayment and ultimately weaken banks' balance sheets, the Commission warns.

Therefore, the finalization of the organizational structure of the new Insolvency Department, the digitization of its tools and the promotion of insolvency proceedings are important measures that must be accelerated, he stressed.

“It is also important to maintain the divestiture framework in order to go further with MES restructuring, asset sales and improving payment discipline,” the report said.

“In the future, ESTIA (the government subsidy scheme for debtors with secured primary housing loans) will have a marginal impact in supporting the reduction of NPLs due to its low absorption,” he concludes.


Source: politis.com.cy

- Advertisement -AliExpress WW

More articles

- Advertisement -AliExpress WW

Latest article