The Cypriot economy – Through a glass, darkly

from The Economist..

April 27, 2013 | Nicosia

AFTER the protests and banners of March, when a proposed bail-out threatened losses on insured depositors, Nicosia is strangely calm (and wet). Some restaurants in and around the Cypriot capital are busy, others are deserted. But under the veneer of normality, the shock of that first, jettisoned bail-out and the bruising terms of the eventual deal are taking their toll. With access to bank accounts still restricted and capital controls in place, Cypriots are hoarding money. Trade credit has dried up, choking business activity.

New-car sales plunged by 59% in the year to March. Sunseekers tend to shun crisis-stricken countries: the number of tourists in the first quarter was 10% down on the same period of 2012. And this is just the beginning. An economy already in recession—GDP fell by 2.4% last year—is about to nosedive, undermining the assumptions on which the bail-out was based.

The longer that capital controls last, the greater the damage will be. The pre-crisis contributions of business services and financial services to output were similar (7.4% and 9.2% respectively). Whatever happens the banks must shrink, drastically. But Cyprus may yet be able to retain its appeal as a business hub in the eastern Mediterranean, providing legal and accountancy services from a qualified workforce. That hope will be dashed, however, if capital controls become entrenched, says Alexander Apostolides, an economist at European University Cyprus.

The central bank has already relaxed some domestic-banking restrictions. The cash limit on withdrawals remains €300 ($390) a day, but use of standing orders and direct debits has been restored. Electronic transfers of capital remain blocked. Far more important are still-stringent external controls. Cypriots cannot, for example, take more than €2,000 in cash when they leave the island.

…….

Before the bail-out, the European Commission was predicting drops in GDP of 3.5% in 2013 and 1.3% in 2014 (see chart). By early April it had changed this outlook to declines of 8.7% and 3.9%. But even this may be too optimistic, according to Fiona Mullen of Sapienta Economics, a local consultancy. She thinks that output will shrink by 15% this year; and she predicts a further drop of 15% in 2014, followed by a 5% fall in 2015. That would mean a cumulative four-year decline in GDP since 2011 of 33%, outstripping even Greece’s likely six-year decline of 24%. If such gloomy predictions turn into reality a labour exodus of biblical proportions rather than capital flight may be what really undoes Cyprus.

Link to the entire article:  http://www.economist.com/news/finance-and-economics/21576666-outlook-even-grimmer-it-was-time-bail-out-through

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