17 December 2013

EY: Outlook for Cyprus

Key findings

After falling by an estimated 7.4 per cent in 2013, GDP is forecast to shrink by a further 8 per cent in 2014 and 2.7 per cent  in 2015, against a backdrop of shattered consumer and investor onfidence, soaring unemployment, and a credit crunch. The economy is not expected to return to growth until 2017, at which stage economic activity will be 20 per cent lower than the pre-crisis peak.

Household incomes are coming under enormous pressure from the impact of fiscal consolidation efforts, while the repercussions of the crisis in the private sector are likely to result in a sharp increase in unemployment to around 25 per cent of the workforce by 2015. As a result, we expect consumer spending to continue to decline throughout 2013–17.

The outlook for investment is even bleaker. Inevitably, much of the fiscal consolidation efforts have fallen on public investment, but private investment is also plunging in response to the near-meltdown of the banking sector in March 2013. With deposits continuing to decline and non-performing loans at very high levels, it will be some time before conditions in the financial sector stabilise and the remaining capital controls can be lifted. Until conditions improve, banks will have very little appetite to lend new money to any but the very safest companies. Firms that do wish to invest their own cash will be unable to do so freely.

Even with such dismal prospects, the downside risks remain considerable. Further household and corporate defaults would exert downward pressure on consumption and investment and create further capitalisation needs for the financial system. Meanwhile, soaring unemployment could undermine fiscal consolidation efforts by cutting tax revenues and forcing up social transfers. In addition, the economy and financial system would be completely destabilised if Greece abandoned its efforts to remain in the eurozone.

However, a glimmer of hope is offered by the country’s gas reserves, which are expected to boost investment and exports in the long term. Preliminary reports place the gross value of these reserves at US$50 billion, approximately three times Cyprus’ GDP.

Full report

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