Economic support measures must be targeted

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Further measures to support the economy from the pandemic’s impact should be targeted at minimizing the consequences while reducing the effects on strained public finances, the Cyprus Central Bank Financial Stability Report argues.

It is also noted that medium-term risks to financial stability are high. The CBC is monitoring them closely to take measures to reduce potential vulnerabilities in the system.

“While the economy of Cyprus in 2020 was affected by health developments, in 2021 support measures should be targeted to mitigate the risks that have been created,” the annual report said.

It said the swift reaction of the supervisory authorities and governments largely contained the negative effects on the real economy.

At the same time, the CBC said the withdrawal of support measures should be gradual to avoid a cliff effect.

“Maintaining the creditworthiness of Cyprus in the investment-grade is considered particularly important at a time when the continued support of the economy is necessary.”

The CBC said using government guarantees to provide loans will help boost lending and mitigate some of the risks of ending the economic support measures, offering liquidity to businesses.

“Pre-existing macroeconomic imbalances, as well as structural problems in the financial sector, should be resolved by creating a healthy and competitive economy that will be able to face new crises without the burdens of the past.”

The report expects a recovery in tourism this year, with an increase in arrivals than a dismal 2020.

Although government support “greatly mitigated” the economic impact of the pandemic, the health crisis has increased uncertainty in the macroeconomic environment, creating new or reinforcing existing risks.

“The recession and the slow recovery of the economy may lead to a deterioration in the incomes and balance sheets of the already indebted companies and households, while increasing the risk for insolvent non-financial corporations, with a consequent increase in unemployment.”

The CBC notes low-interest rates ongoing bond purchases by national central banks and the ECB through bond purchase programs make government access to markets easier, further increasing public debt.

“Non-targeted support measures may pose risks to its future viability.”

“Credit institutions of Cyprus, despite corrections in recent years, have been called upon to deal with the economic impact of the pandemic with an already high level of Non-performing Loans (NPLs), low profitability and structural problems, greatly affecting their ability to provide new loans.”

The CBC believes a new wave of NPLs, provisions and losses after the end of support measures in 2021 should be expected.

“However, this can be reduced with the correct and rapid use of the restructuring tool.

“Credit institutions may face the challenge of deterioration of credit quality on the one hand and reduced profitability prospect on the other.”