Cyprus sees smaller 2014 contraction, growth next year

Reuters    Translate This Article
17 October 2014

* Tourism, start ups slowing recession

* Island could exit EU/IMF programme earlier

* Cyprus was bailed out in 2013

NICOSIA, Oct 17 (Reuters) - Cyprus's economy will shrink this year by less than previously expected and a three-year-long recession seems to be nearing its end, Finance Minister Haris Georgiades said on Friday.

Presenting the 2015 budget to parliament, Georgiades said gross domestic product will decline by less than 3 percent in 2014, the fourth time the forecast has been revised to suggest a shallower contraction.

'If this trend continues, it suggests that the recession has ended its cycle,' he told lawmakers.

A surge in tourist arrivals, a revival of business activity by new start-ups and improved real estate sales compared to 2013 have all helped ease economic conditions, Georgiades said.

Cyprus is following a three-year austerity programme mandated by the European Union and International Monetary Fund, which rescued the island from the brink of bankruptcy with 10 billion euros of loans in March 2013.

At their last review in June, the IMF and European Commission forecast a 4.2 percent contraction this year. The economy shrank by 5.4 percent last year although the pace of the decline in output has slowed since the second quarter of 2013.

Provided the island makes necessary reforms and regains the confidence of international markets, an exit from the bailout earlier than mid-2016 is possible, Georgiades said.

'We would not be talking about a premature exit to attempts at reform ... that must continue even after the troika leaves,' said Georgiades, referring to Cyprus's international lenders.

'If we keep up the pace of improvement, then yes, earlier than 2016 we will as an economy be able to stand on our own two feet.'

Cyprus returned to international markets in mid-2014 after a four-year hiatus during which yields on its traded debt soared, but still relies on EU and IMF funding. It could return again to markets, the finance minister said.

'Provided a favourable economic climate is maintained, we plan to repeat this,' Georgiades said, without elaborating on the size of any issue or the timing.

GREEK JITTERS

Cyprus was forced to seek a rescue when its outsized banking sector collapsed under the weight of bad loans to Greece and remains vulnerable to market jitters about Athens' plan for twice-bailed-out Greece to exit its aid programme early.

Greek stocks and bonds have tumbled this as investors take fright at the exit plan and at the prospect of early elections next year that the anti-bailout Syriza party could win.

On Thursday, the European Central Bank said it will loosen its terms for accepting security from Greek banks to allow them to tap more of its funding, an offer that also applies to Cyprus, the only other country currently in a rescue programme.

That could provide an incentive to stay under the lenders' supervision rather than attempt to go it alone.

On Friday, Georgiades said Cyprus expects to return to growth in 2015 giving a 'cautious and conservative' estimate of a 0.4 percent expansion.

The budget earmarks 6.6 billion euros for spending next year, a 0.6 percent increase over 2014, on income of 5.9 billion euros, a 0.4 percent reduction from last year.

Georgiades said authorities were monitoring the impact on Russia, a key business partner and tourist market, of EU sanctions imposed over Moscow's role in the Ukraine crisis, noting the recent collapse of several Russian tour operators.

'Fortunately it has not had an impact on tourism,' he said.

(Editing by Catherine Evans)

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