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articles | 29 September 2017

ECB says reform is vital for sustainable growth

The European Central Bank (ECB) said that while economic growth in Cyprus is picking up, it still needs reforms and fiscal discipline over the medium-term to be sustainable combined with a reduction in delinquent loans in the system.

Privatisations, electricity market and title deeds are the main areas needing reform, the bank said.

Economic growth, expected to accelerate this year to 3.6% after the Finance Ministry revised its forecast from an initial 2.9%, “exceeded expectations and should remain strong, albeit somewhat decelerating over the medium term,” the ECB said in joint statement with the European Commission on Friday, after the conclusion of the third post-programme surveillance mission.

“It has been increasingly driven by domestic demand, while tourism remains buoyant with positive spill-overs to other sectors of the economy. Labour market conditions have continued to improve, with employment increasing across sectors. The mission also highlighted the benefits of a more determined implementation of the action plan for growth,” the bank said.

“The very high level of non-performing loans remains the key vulnerability of the Cypriot economy, rendering it pressing to significantly accelerate the non-performing loans resolution across all banks,” said the ECB, which jointly with the Central Bank of Cyprus supervises four Cypriot banks. “The stock of non-performing loans is declining but remains high, and continues to weigh on bank profitability”.

It added that while banks are facing difficulties in restructuring delinquent loans from households and small and medium size enterprises as well as clamping down on strategic defaulters, there is the “need to make insolvency and foreclosure-related legal proceedings more efficient”.

Non-performing loans (NPL) restructuring is becoming more challenging, highlighting difficulties in working out retail and small and medium size (SME) loans as well as tackling strategic defaults. This also reflects the uneven efforts across banks to resolve NPLs in a sustainable manner, highlighting the pressing need to step up NPL resolution in banks that are lagging behind.

The ECB said that high private debt continues to negatively affect economic growth, even after a stabilisation of the real estate market which set off in late 2016, accompanied by an increase in construction activity.

It added that while economic performance will help produce better than initially predicted fiscal results “important medium-term risks remain” which include the impact of the recent healthcare reform, which could entail “cost overruns” and the lack of a mechanism to contain the increase of public payroll after 2018.

The ECB also asked Cyprus to monitor the widening current account deficit which reached 5.3% of economic output last year and is expected to remain over 4% until 2019.

Source: Cyprus Mail

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