Cyprus has emerged from a prolonged recession. Regardless, the economy will continue to be challenged by a weak external environment, public sector austerity, competitive pressures on wages and disposable income, and high levels of non-performing loans in the banking sector.
Negotiations between Greek and Turkish Cypriots on the 40-year-old 'Cyprus problem' are reaching a crucial phase. The odds of a deal to reunify the island are higher now than they have been since the last major peace effort ended in 2004, though parliamentary opposition poses a threat.
The Cypriot government has exited its 2013 EU/IMF bailout, but the series of structural and fiscal reforms put in place under the programme have put the country in a position to boost private sector activity and reduce the public debt overhang substantially over the next decade.
Major Forecast Change s
We have revised up our forecast for real GDP growth in 2016 to 2.5% from 1.9% as a result of strong economic data in the beginning of the year, combined with very positive leading indicators.
We have revised up our projection for the Cypriot current account deficit in 2017 to 4.9% of GDP from 3.7% previously, on account of weaker services growth due to an anticipated slowdown in tourist arrivals from the UK.
Cyprus' status as a small, open economy leaves it vulnerable to external risks, particularly from key trading partners Russia and Greece, which are each experiencing severe difficulties.
The UK's referendum vote to leave the European Union could hurt British investment into Cyprus, as well as depress Cypriot tourism revenues.
Given the sharp decline in major categories of expenditure, particularly fixed investment, the recent gains in international competitiveness may prove unsustainable.
|Real GDP growth, % y-o-y||-2.5||1.6||2.5||2.5|
|Nominal GDP, EURbn||17.4||17.4||18.0||18.5|
|Consumer price inflation, % y-o-y, eop||-0.3||-1.5||-1.0||0.2|
|Exchange rate EUR/USD, eop||0.80||0.90||0.90||0.90|
|Budget balance, % of GDP||-0.2||-0.5||0.0||0.0|
|Current account balance, % of GDP||-4.6||-3.6||-4.1||-4.9|
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