According to UCy’s economics research centre, the main drivers of the outlook in 2018 and 2019 include the vigorous growth in domestic activity, the ongoing improvements in the domestic labour market, strong fiscal performance, and favourable domestic financial conditions like low lending interest rates, deleveraging, expansion of domestic deposits and credit.

The projected decline in GDP to 3.5% next year is driven by the recent fall in economic sentiment in Cyprus, the pickup of energy inflation, the slowdown in the EU and the euro area, and European interest rates and spreads which reflect EU and euro area uncertainties, the centre said in its economic outlook report.

However, according to the centre, there were still risks such as the high levels of private debt and non-performing loans (NPLs).

Despite recent progress, high indebtedness and NPLs pose risks to the soundness of the banking system, economic confidence and growth prospects, the centre said.

“The high level of public debt together with the stronger connection between bank and sovereign risk, after the resolution of the Cyprus Co-operative Bank, renders Cyprus vulnerable to shocks.”

A failure to maintain fiscal discipline could add to the economy’s vulnerabilities.

The report warned that given the high level of public debt and problematic loans, delays in the implementation of structural reforms, may dent economic confidence, the sustainability of public finances and growth.

Other downside risks to the outlook include: higher uncertainty in the euro area due to Italy’s deviation from EU budget rules, with possible negative effects on the borrowing costs of other vulnerable euro area countries; slower-than-expected growth in the euro area; higher uncertainty and weaker-than-expected growth in the UK due to a failure of Brexit negotiations, and competitiveness pressures on the Cypriot tourist product from other destinations.

Source: Cyprus Mail