Country Report Cyprus November 2009

Outlook for 2010-11

• Negotiations have made slow progress, but the Turkish Cypriot and Greek Cypriot leaderships remain committed to finding a settlement. The Economist Intelligence Unit puts the chances of a solution 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 will be to support the Cypriot economy while reversing the deterioration in the public finances.
• We expect the general government deficit to decline only slightly from about 4% of GDP in 2009 to 3.7% in 2011.
• The Cypriot economy has contracted by an estimated 0.4% in 2009. A gradual recovery is forecast in 2010-11 but GDP growth will remain well below the average of about 4% a year recorded in 2004-08.
• Weaker domestic demand and lower commodity prices have shrunk the current-account deficit sharply, but it will remain large, at around 6.5-7.5% of GDP during the forecast period.

Monthly review

• The ongoing negotiations to solve the decades-old Cyprus problem picked up speed in October.
• The election on October 4th of George Papandreou as prime minister of Greece may help to foster dialogue between Turkey and the Greek Cypriots.
• The 2010 budget officially presented to parliament in October contained few changes from the initial draft announced in September. It aims to reduce the deficit below 3% of GDP.
• Data from the Inland Revenue Department showed that there was a 7.5% year-on-year fall of corporate income tax in the first nine months of 2009.
• Tourism arrivals fell year on year by 10.7% in the third quarter, to 871,887, having fallen by 9.5% in the second quarter and 15.2% in the first quarter.
• Total outstanding loans to domestic residents fell by 1.5% in July and stagnated in August, having risen by only 1.4% in the second quarter.
• Turkish Cypriot zone: After more than a year of negotiations, the mood in the north has become decidedly pessimistic. There is now a tangible feeling that the negotiations will fail to find a solution.
• Turkish Cypriot zone: According to the Ministry of Trade, the value of imports in the first eight months of 2009 was down by 40% compared with the same period of 2008. Exports fell by 20%.

This report covers the following industry codes:
SIC Code: 70
NAICS Code: 72