European Commission will review Cyprus Macroeconomic Imbalances in 2018

European Commission announced today that it will publish a macroeconomic imbalances in depth report for Cyprus and other 11 countries early in 2018 and against this background includes a commentary on current imbalances in a thematic report communicated today to the Parliament and the Council. Overall, the economic reading highlights issues “relating to external sustainability, public and private debt, vulnerabilities in the financial sector and labour market adjustment”.

Therefore, the Commission finds it useful, also taking into account the identification of an excessive imbalance in February, “to examine further the persistence of macroeconomic risks and to monitor progress in the unwinding of excessive imbalances”.

The document sent to the ministers is called “REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE – Alert Mechanism Report 2018 (prepared in accordance with Articles 3 and 4 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances) {SWD(2017) 661 final}.

The document includes an “IMBALANCES, RISKS AND ADJUSTMENT: COUNTRY-SPECIFIC COMMENTARIES” under its last chapter.

The specific part on Cyprus, basically recaps the findings form Ferbuarys report, plus the specific scoreboard published today by Eurostat and states the following: “in February 2017, the Commission concluded that Cyprus was experiencing excessive macroeconomic imbalances , in particular involving large stocks of private, public, and external debt and the high share of NPLs in the banking system”. The Commission adds that :in the updated scoreboard, a number of indicators remain beyond the indicative threshold, namely the net international investment position (NIIP), the real effective exchange rate (REER), private sector debt, government debt as well as the unemployment rate and the change in labour activity rate”.

According to the report, “the current account deficit widened substantially in 2016 and the negative NIIP remains substantial”.

Furthermore, notes that “cumulated losses in export market shares have been reduced by gains in 2016”, and “cost competitiveness improved, with a significant depreciation of the REER, reflecting the negative inflation experienced until 2016, and contained wages compensating for the low productivity growth”.

Looking forward, further gains “may prove to be a challenge a s these factors fade away”, says the EC. “The level of private indebtedness is amongst the highest in the EU, both for households and corporates, while the deleveraging process is slow”, it notes adding that “in particular, household savings are negative”.

“The deflationary environment until the end of 2016, has reduced the scope for passive deleveraging, a trend that is to be reversed as inflation is forecast to pick up”, reads the report.

Once more the Commission notes that “the very high level of non – performing loans hampers the restoration of a healthy flow of credit to the economy, which is required for supporting potential growth in the medium term”. On the other hand, “the very high government debt – to – GDP ratio is expected to have peaked in 2016” and “unemployment is declining but remains high, notably regarding long – term and youth unemployment”.

Source: Cyprus News Agency