Country Report Cyprus October 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 trying to mitigate the impact on the Cypriot economy of the global financial and economic crisis and subsequently reversing the deterioration in the public finances.
• We expect the general government deficit to decline from about 4.5% of GDP in 2009 to 4% in 2010 and 3.7% in 2011.
• The Cypriot economy will contract by an estimated 0.5% 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.

Monthly review

• The second round of the fully fledged negotiations got under way on September 10th, a week later than planned.
• In his speech to the UN on September 23rd, the Turkish prime minister, Recep Tayyip Erdogan, intervened forcefully in favour of the Turkish Cypriots, drawing criticism from the Greek Cypriot president, Demetris Christofias.
• In mid-September the Ministry of Finance announced its draft 2010 budget, containing savings and revenue-enhancing measures worth ???295m, but the government will be hard-pushed to keep the deficit below 3% of GDP.
• The detailed breakdown of the central government accounts for the first half of 2009 show that total revenue fell by 8.8% year on year, to ???2.7bn, while total expenditure rose by 10%, to ???3.1bn.
• The financial intermediation (mainly banking) and other business services sector has held up well in the current recession.
• Forward-looking data for building permits suggest that certain segments of the construction sector have continued to expand.
• Turkish Cypriot zone: While in the US in September, the Turkish Cypriot leader, Mehmet Ali Talat, met with the British and Swedish foreign ministers, David Miliband and Carl Bildt, and the UN secretary-general, Ban Ki-moon.
• Turkish Cypriot zone: The minister of finance, Ersin Tatar, has called on the commercial banks in the north to cap interest rates at 23% (rates are currently around 29%).

This report covers the following industry codes:
SIC Code: 60;15
NAICS Code: 52;23