The economic recovery continues to gain momentum for a ninth consecutive quarter, as growth is becoming more vigorous and broad-based, contributing to employment growth and the reduction of unemployment, though still remaining high, the Hellenic Bank said in its Economic Review for the first half of 2017.
According to the Flash Estimate compiled by the Statistical Service, real GDP growth rate during the first half of 2017 is positive and estimated at +3.6% over the corresponding period of 2016, the report said, compiled by Dr Andreas Assiotis, Supervisor of the bank’s Department of Economic Research.
Public finances have been consolidated to a large extent to secure the sustainability of public debt, the report said, adding that significant progress has been made to restructure and restore confidence in the Cypriot banking system. The level of non-performing loans (NPLs) is declining but remains very high, which has led to the increase of provision for loan impairments in order to ensure that collateral valuations are reliable and underpin appropriate levels of provisioning.
The better-than-expected economic recovery, along with the improved domestic financial conditions, have created and maintained an environment of improved confidence. This is reflected in the upgrades of the country’s and the largest domestic banks’ credit rating by international rating agencies.
In March, Standard and Poor’s upgraded Cyprus’ long-term rating by one notch to BB+ from BB, which is one notch below the important investment grade. Most recently on July 28, Moody’s upgraded the rating for the Cyprus sovereign to Ba3 from B1. After the Hellenic Bank report was issued, S&P placed the sovereign credit rating outlook of Cyprus from ‘stable’ to ‘positive’, maintaining the BB+ sovereign credit rating.
Taking advantage of the stable market backdrop and the recent rating upgrades, in June, the government tapped the international capital markets for the second time after the completion of the economic adjustment programme, with an issue of a seven year bond of EUR 850 mln at a yield of 2.8%. Since then, government bond yields have declined to historically low levels, allowing the government to refinance national debt on more favourable rates and with extended maturities, Hellenic said.
Access to borrowing through international markets significantly helps the financing of the national debt. The state’s liquidity risk is thus reduced, which although necessary, it is not a panacea for addressing the country’s high debt. Prudent and disciplined management of public finances must continue unobstructed with focus on the real and substantial reforms for fiscal consolidation which will lead to long-term benefits.
The better that expected macroeconomic performance, does not justify complacency and does not signal a relaxation of efforts to further reform the economy. The introduction of significant structural reforms is the beginning of an improvement in the efficiency, productivity and competitiveness of the economy. Important reforms which are still outstanding relate to the implementation of the privatisation agenda along with the reforms within the Public Administration, local government and the healthcare sector.
The Hellenic Bank report said that acceleration of structural reforms would contribute to the revitalisation of productive investments which have recently picked up, but are still impeded by certain structural weaknesses (for instance, time delays with construction permits and enforcement of contracts). The cost of the reforms may have negative effects on the economy’s short-term prospects, but it is the only path to sustainable growth. Additionally, improving the business environment and making it more conducive to growth would support both domestic and foreign investment.
“As an investment destination, Cyprus can offer new investment opportunities in the areas of commerce, services, energy, development projects, shipping, education, health, technology and tourism.
The report added that structural changes which have already been introduced, can lead the country on a path towards economic growth. However, while necessary, structural reforms are not sufficient to place the economy on a sustainable growth path. To make this possible, it is required to create a robust institutional framework to support the complete restoration of confidence to the Cypriot economy by the Cypriot society and the foreign investors.
“By institutions we refer to the set of constraints and incentives that structure political, economic and social interaction and determine the way transactions are made and partnerships between business, citizens and public service are shaped,” the Hellenic report said.
“The absence of credible institutions hinders the effective implementation of laws, creates uncertainty and a negative climate for investment, leading to the right breeding ground for the development of corruption which in turn exacerbates the problem of the proper allocation of resources, undermines property rights and the rule of law. Hence, institutional development is a basic precondition for long-term economic growth as it will lead to social progress, the diffusion of opportunities, social prosperity and the restoration of public’s confidence in public administration.”
