Cyprus’ complete and successful return to the financial markets hinges upon the authorities’ determination to maintain prudent fiscal policy, bank restructuring and structural reforms, the European Stability Mechanism (ESM) said.
Cyprus concluded in March 2016 its three-year financial assistance programme financed by the ESM and the IMF.
In its annual report for 2016, issued on Thursday, the ESM praised the Cypriot economy’s strong momentum and the improved fiscal performance in 2016, which enabled the country to generate a 3% primary surplus and a balanced fiscal position.
“Cyprus is bearing the fruit of reforms introduced over recent years. The country needs however to restart the structural reform momentum, consolidate improvements and promote Cyprus’ international competitiveness to attract investments,” the ESM report said, adding “prudent fiscal policies are particularly important now as the economy recovers.”
The ESM noted that Cyprus returned to the financial markets as its funding cost edged lower, adding that despite junk-rated bonds credit rating agencies’ outlooks were universally positive.
“Looking forward, Cyprus’ complete and successful return to the financial markets will hinge largely on its determination to maintain its prudent fiscal policy, bank restructuring and structural reforms,” the ESM said.
On the banking sector, the ESM notes that although the banks are well-capitalised with modest internal capital generation and non-performing loans trending lower, however, actual restructurings slowed in 2016.
The ESM furthermore said that gradual improvement in economic performance combined with the recovery of the banking sector will enable the privatisation of the Cooperative Central Bank, Cyprus’ only state-owned financial institution, adding that “despite promising developments, new regulatory requirements pose a challenge to the bank’s outlook.”
According to the ESM, cheap EU financing allowed Cyprus to save €400 million in financing costs, compared with the interest rate Cyprus would have paid had it covered its financing needs in the markets.