Country Report Cyprus October 2008

Outlook for 2009-10

• Prospects for a solution to the division of Cyprus have improved as a result of the start of fully fledged negotiations on September 3rd.
• The Economist Intelligence Unit estimates the chances of settlement being concluded during the outlook period to be around 40%. The main challenge will be to win over public opinion.
• Pressure will be strong on both communities and Turkey to solve the Cyprus issue as it is hindering external relations for the EU and NATO.
• Economic policy will remain broadly unchanged under the presidency of Demetris Christofias, but we expect the budget balance to swing back into deficit in 2009-10, following surpluses in 2007 and 2008.
• GDP growth is forecast to slow to 3.5% in 2008 and 2.5% in 2009, before picking up to about 3% in 2010, remaining well above the euro area average.
• After rising steadily to over 5% in July-August 2008, consumer price inflation is expected to ease gradually. The EU harmonised rate is forecast to slow from an estimated annual average of 4.8% in 2008 to 3.5% in 2009 and 2.5% in 2010.
• The current-account deficit is expected to fall from around 10% of GDP in 2007 and 2008 to about 9.5% in 2009, before rising towards 10% in 2010.

Monthly review

• The initial focus of the negotiations between the Greek Cypriot president of the Republic of Cyprus, Mr Christofias, and the Turkish Cypriot leader, Mehmet Ali Talat, will be on governance and power-sharing.
• The atmosphere at the official launch on September 3rd was tense owing to an earlier public row over the proposed Limnitis crossing and the two leaders' insistence in their public statements on their differences and "red lines".
• A full breakdown of public finance figures for January-June 2008 confirms that the budget was in surplus in the first half of the year.
• In late August the Central Bank of Cyprus cut the foreign-exchange reserve requirement for commercial banks from 75% to 70%.
• Growth of gross fixed investment slowed, from 5.5% in the first quarter to 3.7% in the second, owing to a contraction in housing construction.
• Turkish Cypriot zone: Mr Talat has faced criticism from the left and the right in the north.
• Turkish Cypriot zone: The ongoing dispute over property ownership has remained a major source of uncertainty, contributing to the weakness of the Turkish Cypriot economy.