PROSPECTS for the economy in 2009 are uncertain as people spend less, and tourism and construction head into the red, according to Cyprus’ Stability Programme 2008-2012 published yesterday.
“Cyprus has so far weathered the storm, but the prospects for 2009 are more uncertain,” the 79-page report from the Finance Ministry said.
The central scenario of the Stability Programme is based on the assumption that the current international economic crisis will primarily affect the construction, real estate and tourism sectors, and, to a lesser extent, exports of services other than tourism.
Tight borrowing conditions may also affect private consumption, it said.
“However, given the increased degree of uncertainty, more pronounced effects on construction and tourism, as well as, on private consumption and export of services cannot be excluded. Under such scenaria growth may fall to 1.0 per cent with adverse effects on public finances,” it added.
The government expects a deficit of 0.8 per cent of GDP in 2009 compared to the expected surplus of 1.0 per cent for 2008. It also forecasts GDP growth at a low 2.1 per cent this year, which is expected to rebound to 2.4 per cent in 2010 and 3.0 per cent in 2011. Figures released last week put 2008 growth at 3.8 per cent.
It predicts that tourist arrivals will decline by 10 per cent in 2009 and remain relatively flat thereafter. On average, over the forecast period, arrivals will decline by 2.25 per cent on an annual basis, but per capita tourist spending will increase by around 1.7 per cent in real terms annually between 2009 and 2012.
“From the demand side, private consumption growth also is projected to exhibit a considerable correction in 2009 as households attempt to reduce the overall level of indebtedness, slowing to 3.8 per cent from an estimated 7.2 per cent in 2008. Investment is expected to slow down owing mainly to the slackening of construction activity,” the report added.
It also said that despite a boost by public investment in infrastructure projects overall growth of investment in buildings would contract from 1.2 per cent in 2008 to -6.9 per cent in 2009.
The report said however that in the event of a more protracted slowdown, the state had the necessary room to manoeuvre, given the underlying sound fiscal position and stands ready to implement additional measures, if required.
“This represents a cautious approach taking into account the uncertain economic period which we are now entering,” the report said.
“Overall, and irrespective of specific measures which may be taken to address the current slowdown, policies will have to support investment and private sector development, and contribute towards the further enhancement of productivity and competitiveness of the economy,” it said.
“The picture is mixed as some sectors are forecast to perform poorly, relative to trend, while others are
expected to continue performing satisfactorily,” said the report.
This will result in robust employment in some sectors while in other sectors more directly exposed to the external slowdown such as hotels and restaurants and construction, some increase in unemployment will be observed, it added.
“Overall, the gainfully employed population is forecast to continue increasing strongly at around 1.5 per cent per annum, albeit at significantly slower pace compared to the past five years. The unemployment rate will rise somewhat over 5 per cent in 2010 and reach 5.5 per cent in 2012.”
Despite what it called the “pessimistic scenario” the government said the underlying fiscal position was
expected to remain sound, as reflected in the public debt-to-GDP ratio remaining below 50 per cent of GDP.
