By Stelios Orphanides
Hellenic Bank said that while sentiment in the Cypriot economy continues to improve following the culmination of the banking crisis four years ago, it still faces challenges related mainly to private debt this year in which the economy is projected to grow 2.8 per cent.
“Some degree of uncertainty remains, as the country still has certain issues to resolve, such as the high volume of non-performing exposures, the high private indebtedness levels, the high unemployment and delays in the advancement of structural reforms,” Hellenic said in its economic review for the second half of 2016.
Even following “decisive steps” and some progress towards reducing the amount of non-performing loans in the banking system, roughly accounting for almost half of total loans, bad debt still has an impact on the balance sheets of banks, thus reducing their ability to extend credit to the economy, Hellenic said.
Loan restructurings have picked up momentum and the legislative and macroeconomic environment is supportive to reducing non-performing loans, it added.
The economy which is expected to expand next year at a rate ranging between 2.5 per cent to 3 per cent, will help improve the labour market conditions, Hellenic said adding that it expects inflation to “remain relatively low”.
A weaker than expected growth rate in the euro area, a slowdown in the UK and a weaker pound as a result of the Brexit vote may also negatively impact the Cypriot economy, the bank said. Additional downside risks are related to a possible deterioration of the Russian economy and increased geopolitical tensions in the region which could negatively affect economic confidence and tourist arrivals.
Still, geopolitical tensions in neighbouring countries may also help Cyprus profit from being a safe tourist destination and counterbalance possible drops in arrivals from the UK, Hellenic said. “Additionally, developments over a potential reunification of Cyprus along with the exploitation of Cyprus’s natural resources are being closely monitored in order to assess the potential prospects that are being developed,” the bank said.
Finally, Hellenic warned of complacency following the better than expected fiscal results in 2016.