New Market Report Now Available: Cyprus Business Forecast Report Q2 2013

New Country Reports market report from Business Monitor International: "Cyprus Business Forecast Report Q2 2013"

by Bill Thompson

(WireNews+Co) - Boston, MA - 12 March 2013

Core Views

Despite strong scepticism from Berlin over a bailout for Cyprus, we expect a deal to be forthcoming after the country's presidential election in February. However, any aid package will likely come attached with stringent conditionalities, given the politically contentious nature of a fifth euro area bailout ahead of Germany's general election in September.

The Cypriot economy is on course for another year of negative growth in 2013, making the current economic contraction more severe than during the Global Financial Crisis of 2008/2009. Major fiscal austerity and a collapse in final consumption as well as fixed investment will remain the dominant macroeconomic themes in Cyprus. Faced with the prospect of stringent austerity measures as part of a prospective bailout, or alternatively a meltdown of a financial sector several times the size of the EUR18.0bn economy, there is little reason for optimism.

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Cyprus will undergo a period of extensive economic rebalancing over the coming years, as its current balance of payments dynamics no longer seem sustainable. With a period of deleveraging likely to take place in the near future, Cyprus' external imbalances are likely to correct over the next few years. We caution, however, that a precarious net international investment position could trigger a much sharper adjustment in the event that bailout terms are not agreed in the next few months.

We expect centre-right DISY candidate Nicos Anastasiades to win the upcoming presidential election in Cyprus on February 17. Although this favours the island's chances of securing a much-needed bailout in the following month, the incoming administration will need to deal with highly demanding terms to qualify for financial aid. Should opposition in Germany to an eventual bailout not soften in the coming months, recently proposed terms could prove too much for the incoming Cypriot government to push through parliament, threatening to destabilise Cyprus both economically, and politically.

Major Forecast Changes

We have revised our real GDP growth forecast for Cyprus from -1.7% to -2.0% in 2012 and from -0.5% to -1.5% in 2013.

We have raised our estimate for Cyprus' current account deficit in 2012 to -5.2% of GDP from -3.2% previously. In 2013, however, we see the deficit narrowing more rapidly to -4.7% from our previous forecast for a -5.8% of GDP shortfall.

We have raised Cyprus' fiscal deficit forecast for 2012 to 6.6% of GDP from 5.1% previously, and see the funding gap shrinking more gradually to 5.2% of GDP in 2013, from our previous forecast of a 3.7% of GDP deficit.

Key Risks To Outlook

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