COVID19: Cyprus braces for bigger than expected GDP shrink

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Cyprus’ Finance Ministry is preparing for the worst as the country’s economy is expected to take a much bigger hit from the coronavirus crisis than the initially anticipated ceiling of 9.7% GDP.

In the early stages of the outbreak, Finance Minister Constantinos Petrides said that he expected the country’s GDP to shrink between 5-9.7% depending on the duration of the economic shutdown.

According to media reports, the Finance Ministry is now recalculating scenarios which envisage a greater impact.

Apparently, one scenario sees the economy shrinking by 10.6% of GDP while the worst-case scenario predicts a whopping 13% retraction.

The first scenario takes into consideration that the economy will be on lockdown for two months, which would mean that the state’s financing needs will increase by €3.6 bln.

Since mid-March all non-essential businesses have been closed to combat the COVID-19 pandemic, the economic activity will remain restricted until at least April 30.

The second scenario sees the economy being on lockdown for a period of 3-4 months, and financing needs spiralling to €5 bln.

Although the economy was not expected to see GDP growth similar to 2019’s 3.2%, it was hoping to see a growth rate of 2.6% and a budget surplus of €600 mln in 2020.

As things stand 2020 is expected to close with a €1 bln budget deficit.

State income is forecast to shrink by €1.2 bln for 2020, while expenses will be inflated by €845 mln, which means the state will see its financing increasing by €2 bln.

Finance Minister Constantinos Petrides said on Monday, the government’s economic support package announced now equals 5.4% of GDP or €1.32 bln.

According to reports, the Ministry has already informed parliamentary parties of the government’s intentions at a meeting with the House’s Finance Committee.

To support the local economy during the coronavirus crisis, last week Cyprus issued two new benchmark-sized Euro Medium-Term Notes for a total amount of €1.75 bln, adding to the state’s liquidity and capability.

Nicosia will be looking to draw another €750 mln from local banks this week, by issuing local treasury bills with a maturity of 12 months.

With the money from bond issues, along with a €1.7 bln reserves in state coffers, the government will have €4.2 bln at its disposal to buffer the economy as businesses are expected to go under while unemployment spirals.

In the worst-case scenario, the state will need another €800 mln, which it will probably be looking to cover by cutting expenditure or issuing new bonds.

Cyprus is eligible for a low-interest loan of €160 mln from SURE, an EU scheme set up to support employment, while it can also borrow €300 mln from the European Stability Mechanism (ESM) to support the health sector and another €400 mln from the European Central Bank to support businesses.