Brussels, 03/07/2014 (Agence Europe) - Cyprus seems determined to beat the troika's forecasts (the troika being the European Commission, the European Central Bank and the International Monetary Fund). The IMF has again revised several of its indicators upwards. It had forecast in its third monitoring mission that unemployment, for example, would hit 19.2% of the working population, but has now revised the forecast to 18.6% in 2014 and 18% (rather than 18.4%) in 2015.
The aid to cover the country's financial needs does not need to be as high as expected. Cyprus now needs €4.1 billion rather than the forecast €5.1 billion. “The difference, mainly due to better than expected fiscal performance, has allowed Cyprus to maintain a sizeable cash buffer”, says the European Commission, adding: “The third quarter financing needs are expected to be higher than in the second quarter mainly due to the redemption in mid-July of a foreign-law bond of € 0.5 billion. Over the third quarter, total debt redemptions are estimated to amount to around €650 million (Ed: which will be covered by the fifth payment from the European stability mechanism) and fiscal needs to around €350 million”.
The IMF says: “Significant maturities are coming due after the programme period (37 percent of GDP in 2017-20, of which 14 percent of GDP in 2017 alone)”. The Cypriot authorities returned to the capital markets in May, which will no doubt ease the IMF's concerns.
The 2014 recession is not expected to be as bad as forecast (-4.2% rather than -4.8%). The Cypriot central bank recently said, however, that these forecasts are overly pessimistic and the economy is likely to contract by 4% in 2014. For 2015 and 2016, the troika is taking a more gloomy view, expecting growth to be 0.4% in 2015 (rather than its earlier forecast of 0.9%) and 1.6% in 2016, rather than its earlier forecast of 1.9%. The troika explains: “Risks to the economic projections remain tilted to the downside. On the domestic front, slower than expected resolution of non-performing loans (see EUROPE 11111) and a prolonged period of tight credit supply conditions could pose considerable risks to the real economy. On the external side, Cyprus' sizeable trade links with Russia (most notably in tourism and professional services)mean that its exports could suffer, should negative spillovers emerge from the geopolitical tensions between Russia and Ukraine”.
The troika has revised down its public debt forecasts to 124% of GDP in 2015 but the IMF comments: “Projected public debt was revised down slightly due to a slightly higher nominal GDP, and a somewhat lower expected cost of official financing. Still, it remains high; sizeable contingent liabilities associated with government guarantees (20 percent of GDP) and large implicit liabilities associated with the banking sector (including ELA exposure (Ed: emergency liquidity aid from the ECB) of close to 60 percent of GDP) increase its vulnerability to shocks. In particular, a severe shock to growth or a shock combining a deeper recession with higher banking sector contingent liabilities could push debt up to very high levels, which would likely require additional financing measures and commitments from European partners to protect Cyprus's debt sustainability”.
The IMF welcomes the fact that the recent European elections strengthened the leading position of the ruling party, which has reaffirmed its commitment to the financial programme. (EL)