The economy of Cyprus is recovering faster than expected and real Gross Domestic Product (GDP) is on track to reach pre-pandemic levels by Q4 2021, DBRS Morningstar said on Thursday (Nov.18).
The Canada-based credit ratings agency in its commentary report also notes that compared with other southern European economies, which also have important tourism-related activities, Cyprus’ recovery has out-performed all but Greece.
“Cyprus is recovering faster than expected and conditions are set for sustained growth in the medium-term” DBRS Morningstar Vice President Javier Rouillet commented. “We expect this positive macroeconomic backdrop should facilitate a continued improvement in Cyprus’s public finances and help banks to continue their balance sheet repair efforts,” Rouillet added.
The GDP in Cyprus expanded 5.3% in the third quarter of 2021 over the same quarter of the previous year with the tourism related-activities and manufacturing sector as main drivers of growth during the quarter. Tourist arrivals from Russia have performed relatively well and for the first nine months of 2021 accounted for around 32% of total tourism arrivals, outstripping the United Kingdom as the main source market thus far this year.
As of Q3 2021, Cyprus’s real GDP was only 0.7% below its Q4 2019 level.
Looking at the sectoral breakdown until Q2 2021 (latest available data), DBRS Morningstar notes that the substantial growth in the financial services, information and communication, public administration, education and social works sectors allowed for this recovery to take place.
Despite the presence of hurdles and challenges, DBRS Morningstar anticipates that the country’s favourable medium-term growth prospects will facilitate the repair of its public accounts and the further cleaning up of its banking system.
The report adds that successful implementation of the investments and reforms envisaged in the Recovery and Resilience Plan (RRP) offer a unique opportunity to deal with pre-existing issues that have been holding back economic performance in the past.
These issues include Cyprus’ high level of troubled assets, relatively weak productivity, low digitisation percentage, poor energy efficiency as well as low productive investment levels.
In its latest forecast, the European Commission (EC), the EU’s executive arm, projects GDP growth to reach 5.4% this year, 4.2% next year, and 3.5% in 2023, broadly in line with Cypriot government projections.
Meanwhile, private consumption is expected to recover strongly in 2021, driven by the release of pent-up demand and the strengthening labour market as the economy reopens.
The ongoing recovery in the tourism sector, with tourist arrivals currently assumed to reach pre-pandemic levels by 2023, is expected to boost real exports by more than 6% annually during 2021–23. Real investments are estimated to grow by 5% annually during 2021–23 lifted by the European Union (EU) recovery funds. This is particularly encouraging, given the relatively low levels of investment in Cyprus since the global financial crisis, DBRS ratings agency said.