Country Report Cyprus March 2009

Outlook for 2009-10

• Full settlement negotiations started in September 2008, but progress has been painfully slow. The Economist Intelligence Unit puts the chances of settlement during the outlook period at about 40%.
• There will be strong pressure on both communities and on Turkey to solve the Cyprus issue as it is hindering external relations for the EU and NATO.
• The main focus of economic policy in 2009-10 will be trying to mitigate the impact on the Cypriot economy of the global financial and economic crises, which has been limited so far, but is expected to deepen.
• We expect the budget balance to swing back into deficit in 2009-10, following surpluses in 2007 and 2008. However, at 2-2.5% of GDP it will remain comfortably below the 3% ceiling for euro area countries.
• GDP growth is forecast to slow from an estimated 3.5% in 2008 to 1% in 2009 and 1.2% in 2010. This would still be above the euro area average, but the weakest growth that Cyprus has recorded since 1993.

Monthly review

• The Greek and Turkish Cypriot leaders have moved quickly through a "first reading" of the difficult property issue to avoid signs of discord before the Turkish Cypriot legislative election on April 19th 2009.
• A dispute over the exact number of Turkish troops stationed on the island came to a head in February.
• Inland revenue collections rose by only 0.8% year on year in January-December 2008, compared with an increase of 4.1% in January-September.
• In response to signs of economic weakening, the government announced a €300m stimulus package on February 4th 2009.
• While most other euro area economies contracted sharply in the fourth quarter of 2008, Cypriot GDP rose by 0.6% quarter on quarter, according to a preliminary flash estimate issued in early February.
• The tourism sector had another bad year in 2008. Total tourist arrivals fell by 0.5%, to 2.4m arrivals, having risen by only 0.6% in 2007 and fallen by 2.8% in 2006. Tourism revenue fell by 3.5%, to €1.8bn.
• Turkish Cypriot zone: A recent poll gave the right-wing National Unity Party (UBP) in opposition a clear lead ahead of the parliamentary election in April.
• Turkish Cypriot zone: The government has provisionally estimated that the Turkish Cypriot economy contracted by 1.9% in 2008. In January 2009 the situation appeared to deteriorate further.

This report covers the following industry codes:
SIC Code: 60;1;10;15;48;70
NAICS Code: 52;11;212;23;517;72