The Economist Intelligence Unit (EIU) maintained its Cyprus GDP growth forecast at 3.4% and 3.6% for 2007 and 2008 respectively, according to the Sharelink Securities & Financial Services update.
Low growth in the tourism sector will be partly offset by continued strength in exports of business services such as accounting. Investment growth is likely to remain strong as a result of ongoing works to upgrade the two airports, while work to construct new marinas may get under way in 2008, if the government can speed up the tender round.
Government consumption growth is also expected to accelerate, driven by the forthcoming presidential election in February 2008. According to EIU, private consumption growth will be supported by continued strong credit expansion and a fall in commercial (as opposed to official) lending rates from 2008, as local banks respond to competition from other Euro area banks. Credit growth will also help to maintain demand in the construction and retail sectors. The British agency points out that the main risk to this forecast is a sudden fall in credit growth; However it says, this seems unlikely, given that banks are enjoying strong profit growth, commercial interest rates are expected to fall further, and overall lending as a share of GDP is probably lower than in countries such as the UK and Spain.
EIU’s central forecast about interest rates is that the European Central Bank (ECB) will raise rates twice more before the cycle comes to an end at 4.25%. Rises above 4.25% would only occur if growth were to continue as strong as in 2006 and show no sign of slowing by the end of 2007. However, EIU says, Cypriot commercial lending rates, which are higher than in the Euro area, should continue to fall from 2008. The final convergence of Cyprus and ECB rates will happen in the last two months before the adoption of the Euro.
The EIU says that the Cyprus pound is already approaching the central parity rate. Under the planned schedule the exchange rate with the Euro will be locked in July 2007; mandatory dual pricing in euros and Cyprus pounds will run from September 2007 until June 2008; and the Cyprus pound will cease to be legal tender in February 2008. According to EIU the Euro is forecast to strengthen against both the US dollar and sterling on average in 2007-08.
Source: The Financial Mirror
