The Central Bank of Cyprus has revised downwards its projections regarding the growth rate of the Cypriot economy, forecasting a marginal growth of GDP by 0.3% in 2011 and zero growth in 2012 due to the negative financial environment.
The CBC stresses that Cyprus could reach the target for a 2.8% public deficit only if the measures included in the state budget for 2012, which the House of Representatives approved on December 16 and supplementary measures also approved by the House on December 14, are implemented immediately and fully.
In its December 2011 Economic Bulletin, issued Monday, the CBC suggests that Cyprus’ exclusion from the international financing markets in the last six months, as well as the recent warning by the European Commission on the consolidation and correction of public finances “leaves no room for further delay in implementing what has been voted for”.
The CBC notes that an imminent consequence of the financial deterioration for the state is the loss of credibility and notes that Cyprus’ exclusion from the markets since May 2011 has resulted to consecutive downgrades of its economy and the banks.
The Bulletin notes that Cyprus economy is showing signs of recession in the second half of 2011, while it says that the third quarter records a significant decline in GDP, with no prospects of recovering soon.
Under the main scenario, Cyprus’ GDP will increase marginally in 2011, by 0.3%, while anticipated growth for 2012 is projected to be zero, as a result of the ongoing negative climate.
It is added that a more positive outlook is projected for 2013, when growth is expected to reach 1.3% of GDP.
Quoting foreign analysts, the CBC says that the main reason for downgrading Cyprus banks is the country’s limited margin of reaction in supporting its banking system, if deemed necessary. The latter could come as a consequence of questioning the decision taken by the EU leaders to proceed with a 50% haircut of Greek debt, it is noted.
Furthermore, the CBC says that public spending increased with a quick pace compared to economic growth, and adds that from 2007 to 2011 government spending (except loan repayments) are expected to increase by 36.4%. Nominal GDP growth in the same period is estimated at 14.4%, while real GDP growth is projected at 3.3%.
The Central Bank notes that fiscal policy should focus on restraining public spending and suggests that measures adopted along with the 2012 state budget, as well as the supplementary measures that have been approved, should be implemented immediately. The CBC also says that more structural reforms should be considered.
It is added that irrespective of tax revenues increase, it is impossible to cover the growing trend of public spending, even if the latter slows in pace.
The CBC suggests that restraining public spending needs to be achieved through unproductive spending cuts, in order not to undermine the country’s development.
On unemployment rates, the CBC notes that an increase is expected due to weak economic activity and adds that October levels are above the unprecedented 8% threshold, quoting seasonally corrected data, provided by Eurostat.
The CBC Economic Bulletin also says that the European Commission has confirmed recently the deterioration of Cyprus’ economy and has estimated government deficit in 2011 at 6.7% of GDP, putting it on a negative outlook if no measures are taken.
Inflation is expected to rise to 3.4% in 2011, from 2.6% in 2010, before shrinking to 2% in 2012.
The main reason for this rise, CBC notes, are high annual increase rates recorded in the price of processed food, industrial products (except energy) and services.
The Bulletin also notes that the Harmonized Index of Consumer Prices is expected to increase to 1.8% in 2011 from 0.5% in 2010, in all areas except energy, while in 2012 it is expected to stabilize at around 1.7%.
On the country’s banking sector, the CBC says that it is confronted with serious potential challenges and risks, under the light of domestic macroeconomic deterioration and the country’s fiscal condition.
The CBC finally notes that pressure has intensified during the second half of 2011 both on profitability, due to the deterioration in the quality of the loan portfolio and the Greek government bond haircut, as well as on the liquidity and capital adequacy of the banking sector.
