The five risks for the Cypriot economy and their potential impact

The Cypriot economy is being faced with five main risks over the next four years until 2028, which, according to Ministry of Finance estimates in a new report, could impact the basic macroeconomic scenario on which the Government's fiscal goals are based.

According to what is stated in the ‘Risk Analysis’ chapter of the Ministry's report, the Strategic Fiscal Framework was prepared after taking into account both the current economic developments of the Cypriot economy as well as the macroeconomic forecasts and fiscal targets that have been set.

At the same time, the existence of risks, which could affect the basic macroeconomic scenario on which the fiscal targets are based, is noted.

The dangers

More specifically, the most important risks stem from the geopolitical developments in Ukraine, after the invasion by Russia, as well as from the war in the Middle East.

These two wars, the Ministry of Finance emphasises, have greatly increased uncertainty internationally, while they have led inflation levels to high levels, resulting, among other things, in the significant rise in interest rates, while their outcome will largely determine rate the development of the global economy in the coming years.

According to the Ministry of Finance, pressure may also be exerted by the excessive costs resulting from the increased flow of immigrants.

The reports also notes that the inclusion of legal and natural persons from Cyprus on the US sanctions lists and the United Kingdom, continues to influence the service sector in Cyprus.

"In the event of a recurrence of this phenomenon, the blow may intensify," warns the Ministry of Finance.

An increase in NPLs is not excluded

In addition to the above, the Ministry of Finance indicates that developments in the banking sector are still considered a potential source of risk, mainly due to the still high - despite significant progress - rate of non-performing loans (NPLs).

"Given the invasion of Ukraine, the sanctions imposed impact on the real economy and the rise in key interest rates, an increase in NPLs cannot be ruled out," the Finance Ministry warns.

On the other hand, he emphasizes, "significant steps are continuously being taken towards effectively reducing the level of NPLs, while the banking system is supported by a resilient capital position and excess liquidity".

In addition, a potential risk is the burden on public finances from the General Healthcare System, mainly through the deficits of the Health Insurance Organisation, which can be covered by the state during its first six years of operation, whose work has been particularly burdened due to the pandemic.

The impact of Recovery Plan investments

It is noted, however, that according to the Ministry of Finance, "the macroeconomic forecasts are based on only a partial inclusion of the impact of the investments that are expected to be implemented in the context of the Recovery and Resilience Plan".

Additional new investments beyond the Recovery and Resilience Plan, he explains, are not fully factored into the baseline scenario because it is difficult at this stage to quantify the annual impact.

"These investments are related to the energy sector, health and education", he points out.

The basic macroeconomic scenario

It is worth noting that based on the macroeconomic scenario of the Ministry of Finance for 2024, the fiscal balance is expected to remain in surplus of €903 million, while as a percentage of GDP it is estimated at 2.9%, compared to a surplus of €919 million (3 .1% of GDP) in the previous year.

At the same time, the primary balance is also estimated to be in surplus of €1,342m (4.3% of GDP) in 2024 compared to a primary surplus of €1,349m (4.5% of GDP) in 2023.

Moreover, based on the macroeconomic scenario of the Ministry of Finance, the fiscal balance in 2025 is predicted to be in surplus of €936 million, while as a percentage of GDP it is expected to rise to 2.8%, lower by 0.1 percentage point of GDP compared to the forecast for fiscal output in the current year.

In the medium term, the fiscal balance is expected to remain in surplus, showing a marginal deterioration, and to fluctuate at 2.4% of GDP on average during the period 2026-2028.

(Source: InBusinessNews)