Cyprus Country Risk Report

Published 28 January 2015 | Quarterly

  • 44 pages
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Cyprus Country Risk Report

Core Views

  • Cyprus is past the worst of its brutal recession. Regardless, t he economy will continue to be challenged by a weak external environment, public sector austerity, competitive pressures on wages and disposable income, and the deleveraging of the banking sector.

  • Although the Cypriot government's fiscal consolidation plan will pay dividends in terms of long-term growth , it has come at the cost of weakening near-term economic activity.

  • 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 Change

  • We have lowered our 2015 real GDP growth forecast to 0.2% from 0.4%, on account of tighter-than-expected fiscal policy, and a deterioration in the outlook for Russian demand for Cypriot services.

Key Risks To Outlook

  • Given the sharp decline in major categories of expenditure, particularly fixed investment, there is the potential for a stronger rebound than we are currently pencilling in over the next two years. We reiterate, however, that the economy and the components of expenditure are likely to remain well below their peaks in real terms for several years to come.

Macroeconomic Forecasts (Cyprus 2013-2016)
Indicator 2013 2014e 2015f 2016f
BMI/Eurostat
Real GDP growth, % y-o-y -5.4 -2.3 0.2 1.2
Nominal GDP, EURbn 18.1 17.6 17.8 18.2
Consumer price inflation, % y-o-y, eop 0.4 0.0 -0.3 1.2
Exchange rate EUR/USD, eop 0.72 0.83 1.00 0.93
Budget balance, % of GDP -4.9 0.0 0.7 1.1
Current account balance, % of GDP -1.7 -0.8 -1.1 -0.8

Table of Contents

Executive Summary
5
Core Views
5
Major Forecast Changes
5
Key Risks To Outlook
5
Chapter 1: Political Outlook
7
SWOT Analysis
7
BMI Political Risk Index
7
Domestic Politics
8
External Risks Increasing In 2015
8
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
8
Long-Term Political Outlook
9
Cyprus Problem And The Economy Are The Dominant Issues
9
Cyprus celebrated 50 years of independence on October 1 2010, yet the island remains divided along ethnic Greek and ethnic
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
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
11
SWOT Analysis
11
BMI Economic Risk Index
11
Economic Activity
12
External Headwinds To Weigh On Recovery
12
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
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
12
TABLE: Nominal GDP Revisions , 2013 Data
13
Fiscal Policy
15
Further Fiscal Consolidation Ahead
15
With the political backdrop likely to remain stable, and the economy slowly turning the corner, we expect the government to make further
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
15
Balance Of Payments
16
External Adjustment Nearly Complete
16
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 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
16
Regional Monetary Policy
18
Q&A On ECB QE
18
TABLE: European Central Ban k - Capital Ke y for Euro zone Me mbers
18
Chapter 3: 10-Year Forecast
25
The Cypriot Economy To 2024
25
Long Road To Recovery
25
Cyprus will continue to experience weak economic growth and a painful structural adjustment process over the coming years that will
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
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
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 Macroeconomic Forecasts
25
Chapter 4: Operational Risk
27
SWOT Analysis
27
Operational Risk Index
27
Operational Risk
28
tABLE: Developed States - Labour Market Risk
28
Table : Developed States - Logistics Risk
31
Table : Developed States - Crime And Security Risk
33
table : Developed States - Trade And Investment Risk
35
Chapter 5: BMI Global Assumptions
39
Global Outlook
39
New Era For Oil
39
Table : Global Assumptions
39
Table : Developed States , Real GDP Growth, %
40
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
40
Table : Emerging Markets , Real GDP Growth , %
41

The Cyprus Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Cyprus. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.

An influential new analysis of Cyprus's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).

Key Uses

  • Forecast the pace and stability of Cyprus's economic and industry growth through end-2019.
  • Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
  • Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
  • Contextualise Cyprus's country risks against regional peers using BMI's country comparative Risk Index system.
  • Evaluate external threats to doing business in Cyprus, including currency volatility, the commodity price boom and protectionist policies.

The Cyprus Country Risk Report by Business Monitor International (BMI) includes three major sections: Economic Outlook, Political Outlook and Operational Risk.

Economic Outlook:

How will the Cyprus' economic policy-making and performance impact on corporate profitability over 2015-2019?

BMI provides our fully independent 5-year forecasts for Cyprus through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.

Economic Outlook Contents

The Cyprus Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.

Key Areas Covered:

Data:

  • Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
  • BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.

Written Analysis:

  • Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
  • Balance of Payments - trade and investment, current and capital account.
  • Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
  • Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
  • Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
  • Foreign Direct Investment - approvals, inflows and climate.
  • External Debt - debt profile (short and long-term plus public and private sector obligations).
  • Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.

Key Benefits

  • Rely upon BMI's 100% independent forecast scenarios for Cyprus and underlying assumptions - we take no advertising and are privately-owned.
  • Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Cyprus, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
  • Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.

Political Outlook:

What are the political risks to doing business in Cyprus over the next 5-years?

BMI's Cyprus country Risk Index evaluates the short- and medium-term threats to political stability.

Political Outlook Contents

  • SWOT Analysis for the Cyprus Market - Political Strengths, Weaknesses, Opportunities and Threats facing Cyprus.
  • Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Cyprus's risk are compared with regional and global averages.
  • Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
  • Long-Term Political Outlook BMI examines the structural risks to the stability of Cyprus’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.

Key Benefits

  • Benchmark Cyprus's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
  • Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
  • Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.

Operational Risk

What are the current operational risks and difficulties associated with doing business in Cyprus?

The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks Cyprus against its neighbours.

Operational Risk Contents

The chapter provides a summary of the main threats in the country, within:

  • Labour Market Risk (Education; Availability of Labour; and Labour Costs)
  • Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
  • Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
  • Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).

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Testimonials

The sections that I find most interesting and useful are the macroeconomic data and forecasts for the country, top export destinations and economic activity. The indicators/analysis of these areas helps us orient our thinking, our assumptions and, consequently, our decisions in the commercial area.

Country Manager, DHL Express