Country Report Cyprus May 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 a 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 started 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 3.7% in 2008 to 0.7% in 2009 and 1.2% in 2010. This would compare well with a 4.3% decline this year for the euro area, but will be the weakest growth that Cyprus has recorded since 1993.

Monthly review

• The Greek Cypriot leader, Demetris Christofias, has publicly denied that there is a deadline for a settlement, but he and the Turkish Cypriot leader, Mehmet Ali Talat, seem to be aiming for an implicit date of November-December 2009.
• Deteriorating relations between Mr Christofiass Progressive Party of the Working People (Akel) and its main coalition partner, the Democratic Party (Diko), have hindered faster progress in the settlement talks.
• An extensive poll published on April 8th showed that only just over 25% of Greek and Turkish Cypriots expected a solution, but that there was also room for compromise on some traditionally difficult issues.
• According to the 2008-12 Stability Programme published in February, the public finances will deteriorate faster than the government previously projected, partly because of the global crisis, but also because of spending plans.
• The government plans to issue about 1bn in eight-month Treasury bills to commercial banks in April to encourage them to cut lending rates.
• Retail sales started to fall year on year in the fourth quarter of 2008 and bank credit to households stagnated in the two months to February 2009.
• Turkish Cypriot zone: A poll published on April 4th showed the opposition National Unity Party (UBP) well ahead of the ruling Republican Turkish Party (CTP) in the run-up to the legislative elections on April 19th.
• Turkish Cypriot zone: Economic difficulties and fiscal austerity measures have hit the CTP's support hard.

This report covers the following industry codes:
SIC Code: 48
NAICS Code: 517