The Cypriot economy will continue to grow with a robust pace over 3% until 2021 mainly underpinned by strong domestic demand, economic activity and investments, the Central Bank of Cyprus (CBC) said in its economic bulletin for December 2018.
The CBC projects that economic growth will reach 3.8% in 2018 and will decelerate to 3.7% in 2019, while economic expansion is projected to decline further to 3.2% and 3.3% in 2020 and 2021 respectively.
The main drivers for growth in the forecast horizon are domestic demand, economic activity and investments, the CBC said.
“Large private investments amounting to €3 billion with a sizeable funding percentage coming from foreign capital have already begun and are projected to conclude by 2021,” the CBC said, noting these investments include renewable energy infrastructure projects, various constructions for housing, commercial and mixed developments, marinas, hotel units and the casino resort.
These projects, the CBC added, “are expected to give great momentum to the Cypriot economy in the coming years.”
However, the CBC pointed out the continued deleveraging efforts by the domestic private sector and the banks’ efforts to rationalise their balance sheets and reduce the high burden of non-performing loans will to certain extend weigh down economic growth.
On the banking sector, the CBC said the recent sales of NPL portfolio such as the sale of €2.7 billion of NPLs by the Bank of Cyprus to Apollo Capital have improved their asset quality, boosting investor and depositor confidence.
“Despite the noted progress which will reduce NPL rate under 30% we are still far from the European average levels of 3.6%,” the CBC stressed.
Moreover, the CBC expressed reservations over a government scheme called ESTIA (home) aiming to subsidise part of the repayment plan for non-performing housing loans.
Approved by the EU DG Competition, the plan is expected to be launched in 2019 and will cost the government €33 million annually for the next 25 years.
“Our concerns are premised mainly on the possible moral hazard, which could be manifested through deliberate defaults by borrowers which hope for future state assistance or believe the scheme is unfair as it subsidises strategic defaulters,” the CBC said, adding “therefore any scheme should assist the efforts by all stakeholders for the creation of a repayment culture and not to increase risks for the contrary.”
On the fiscal side, the CBC said Cyprus will continue to post a strong fiscal position with high fiscal surpluses but cautioned against demands which increase state expenditure.
“The trend for demands which increase state spending should not lead to a slippage. Any increase in state expenditure should be controlled and targeted to avoid a fiscal derailment,” the CBC underlined, recalling that rating agencies have concluded that Cyprus’ public debt will continue its significant downward trend.
“Therefore, the continuation of the public debt reduction is a sine qua non,” the CBC stressed.