Cyprus’ main trading partners, Greece in particular,
remain mired in recession. Its two largest banks – key employers – will be restructured
and unemployment will undoubtedly rise. Meanwhile, the government will be
cutting spending and raising taxes, laying off public sector workers and
embarking on some strict labour and product market reforms – as part of the
standard Troika bailout package. Many of these reforms are needed but as we
have seen across Europe, when combined with other impacts mentioned above, a downward
spiral can be created.
The key hope for growth remains tourism. However, with
the euro remaining strong and the prospect for political and social unrest in
Cyprus still high, it is difficult to see a huge boost in this area. It will
continue to truck along but is unlikely to fill the gap left by other areas of
the economy shrinking. As we have discussed before, the prospect of growth from
large gas revenues remains a pipe dream for now.
With all of this in mind we have put together a
comparison of some of the previous growth estimates, along with the implicit
ones included in the latest troika report and some of OE’s initial (optimistic)
projections (click to enlarge).
All of this remains uncertain, depending on when capital
controls are removed and how investors respond but it does not make pretty
reading. All previous hopes for the economy are off the table and expectations
need to be severely adjusted. The Troika's estimates are very optimistic, particularly in terms of returning to rapid growth in 2015 and 2016. Furthermore, if the growth estimates included in
the bailout prove to be overly optimistic it means Cyprus will, just as Greece
did, require further financial assistance.
