Insider Economy European Commission: Cyprus still experiencing excessive macroeconomic imbalances

European Commission: Cyprus still experiencing excessive macroeconomic imbalances

The European Commission concluded today that Cyprus is still experiencing excessive macroeconomic imbalances, in particular involving a very high share of non-performing loans that burden the financial sector and high private sector, government, and external debt, in a context of moderate potential growth. This view is expressed in the Cyprus chapter of the “alert Mechanism Report for 2021”, prepared by the EC, in accordance with Articles 3 and 4 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances.

According to the report,  the updated scoreboard including figures until 2019, the current account deficit, the net international investment position (NIIP), private sector debt and the government debt ratio indicators are beyond the indicative threshold.

MIP relevant CSRs issued in 2019 and 2020 are broadly associated to fiscal-structural policies, private sector debt, NPLs and the business environment. Beyond warranted policies to address the pandemic, actions taken in 2020 to address imbalances relate to the justice system, public administration, local government and access to finance.

Real GDP growth is forecast to fall substantially as a result of the COVID-19 crisis, from 3.1% in 2019 to -6.2% in 2020. Real growth is forecast at 3.7% in 2021, leaving the nominal GDP level 0.7% lower than in 2019.

A number of relevant developments can be summarised as follows:

– External vulnerabilities remain a concern, as the NIIP is significantly negative, despite improvement in 2019 and that a large part reflects activities of special purpose entities. The current account showed a large deficit of 6.3 % of GDP in 2019, and it is expected to deteriorate sharply in 2020 with the strong drop in tourism.

– The corporate debt ratio continued to decrease in 2019 although remaining elevated. The non- financial corporations deleveraged faster than households did.

– Household debt stood at about 90% of GDP in 2019, above prudential thresholds. In 2020, private sector debt ratios are expected to increase due to the decline in nominal GDP and the loan moratoria. The downward trend is expected to resume in 2021.

– While the government debt to GDP ratio declined in 2019, it is forecast to rise by broadly 20 pps. in 2020, reaching close to 113% of GDP given the fiscal support measures, additional bond issuance and GDP contraction.

– The stability of the banking sector improved in recent years with marked declines in NPLs over 2018-2019. In 2020, increases in the NPL ratio has been limited given asset sales and write-offs but it may increase more in 2021 with the lifting of the moratoria on debt repayments.

The EC notes that Cyprus entered the COVID-19 crisis with vulnerabilities linked to external, private sector and government debt and to still high non-performing loans, in a context of moderate potential growth.

With the COVID-19 crisis, the current account deficit has deteriorated, the debt ratios have increased while banks’ non-performing loans deleveraging has slowed down.

Overall, the Commission finds it opportune, also taking into account the identification of an excessive imbalance in February, to examine further the persistence of macroeconomic risks and to monitor progress in the unwinding of excessive imbalances.

(CNA)

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