Cyprus Mail 18 November 2020 - by Staff Reporter
Cyprus is still experiencing excessive macroeconomic imbalances, in particular involving a high stock of non-performing loans that burden the financial sector, and high private, government, and external debt, the European Commission said on Wednesday.
According to the Commission’s Alert Mechanism Report for 2021, 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.
Real GDP growth is forecast to fall substantially as a result of the covid-19 crisis, from 3.1 per cent in 2019 to -6.2 per cent in 2020.
Real growth is expected to reach 3.7 per cent in 2021, leaving the nominal GDP level 0.7 per cent lower than in 2019.
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 per cent of GDP in 2019, and it is expected to deteriorate sharply in 2020 with the strong drop in tourism.
Corporate debt ratio continued to decrease in 2019 although remaining elevated. The non- financial corporations deleveraged faster than households did.
Household debt was about 90 per cent 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 expected to rise by broadly 20 pps. in 2020, reaching close to 113 per cent 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.
