The Cypriot economy may be able to withstand the shocks from the crisis in the Middle East and other exogenous factors, with the outlook remaining positive, however, the potential risks are growing.
In particular, geopolitical developments, the possible trade war, foot-and-mouth disease, the Vasilikos terminal, the GSI electrical interconnection between Cyprus and Greece, the gradual restoration of haircut depositors and securities holders, the GHS and sanctions on Russian-owned companies make up a dangerous cocktail for the Cypriot economy in 2027.
The risks, key directions and priorities of the Government's economic policy are included in the Strategic Fiscal Policy Framework 2027-2029.
The framework lists the risks that could affect the baseline macroeconomic scenario, with the main aim of the state to build the required defenses, with the aim of containing them.
The crisis in the Middle East and the Ukrainian issue is a headache
According to the Fiscal Policy Framework, significant risks stem from geopolitical developments in Ukraine, following Russia's invasion, as well as from the war in the Middle East.
As he notes, their outcome will largely determine the development of the global economy in the coming years.
Another potential risk is the possible start of a trade war at the international level, which could affect the growth prospects of the Cypriot economy, mainly indirectly.
In addition, the possible new inclusion of legal and natural persons from Cyprus in the US and UK sanctions lists may affect the service sector in Cyprus.
At the same time, based on the Fiscal Policy Framework, risks arise from the possible expansion of foot-and-mouth disease, which will cause negative ramifications on the production and export of dairy products.
On hot coals for terminal and GSI
Also, risks arise from the termination of the works of the natural gas terminal in Vassiliko and from the International Arbitration taking place in England, such as the non-liquidation of the consortium's guarantees, the possible demand for payment of the loans granted with a government guarantee and the return of the subsidy amount by the European Commission.
Another source of risks is the participation, depending on the decisions taken, of the Republic in the project of the Crete-Cyprus electrical interconnection, Great Sea Interconnector.
At the same time, it is stated that the gradual implementation of the Replacement Plan for the Haircut Depositors and Securities of the Bank of Cyprus and Laiki Bank through the National Solidarity Fund should also be taken into account.
Fears of a rise in non-performing loans
At the same time, it is pointed out that, given the geopolitical developments, the sanctions imposed on legal entities of Russian interests as well as on natural persons, the impact on the real economy through the increase in prices and the possible increase in the key interest rates of the European Central Bank, an increase in non-performing loans in the banking sector cannot be ruled out.
On the other hand, it is emphasized, important steps are constantly being taken towards the effective reduction of the level of non-performing loans, while the banking system is supported by a resilient capital position and excess liquidity.
Concern about GHS and OKYPY deficits
An additional potential risk, according to the Strategic Framework, is the burden on public finances from the GHS, mainly through the deficits of OKYPY, which are covered by the state during the first six years of its operation, the work of which has been particularly burdened due to the pandemic.
It is noted that the macroeconomic projections are based on only a partial inclusion of the impact of the investments expected to be implemented under the Recovery and Resilience Plan.
As noted, additional new investments beyond the Recovery Plan are not fully taken into account in the baseline scenario, due to the fact that it is difficult at this stage to quantify the annual impact. These investments relate to the energy sector, health and education.
Growth at 2.9% in 2027
The economy will continue to record high growth rates in 2027, due to the further increase in domestic demand. In particular, domestic demand will be supported mainly by the increase in private consumption, which remains an important driver of economic growth.
Large private projects, such as residential private investments, infrastructure projects for digital and green development, as well as reform projects in the context of the implementation of the Recovery Plan, are expected to make a significant contribution to domestic demand.
At the same time, it is noted that the continued influx of foreign companies, which are mainly export-oriented in the technology sector, but also in other exports of services, is expected to contribute positively.
In terms of the real economy, according to the baseline macroeconomic scenario, in 2027 the growth rate is projected to accelerate and fluctuate around 2.9%, while for the years 2028-2029 it is estimated to be around 3.0%. Inflation will decrease and will fluctuate at 2.5%.
