Feb. 17, 2011 -
PRLog -- A Complicated Year Ahead T he government continues to search for ways to reduce the fiscal deficit, which is expected to come in at 6% of GDP in 2010. Finance Minister Charilaos Stavrakis has presented parliament with additional revenue-
raising proposals worth an estimated EUR 150mn, including higher VAT taxes on food, a hike in the corporate tax rate for local firms, and new property taxes. The measures will face stiff resistance in the lower house, which rejected similar measures earlier in the year, asking for more spending cuts in the bloated public sector. However, powerful labour unions are not willing to make more concessions. As such, we believe the government will fail to hit its deficit targets of 4.5% of GDP and 3% in 2011 and 2012 respectively, forecasting instead a shortfall of 5.2% and 4.2% respectively. Based on this assumption, we expect public debt to continue rising to 67% by 2012, when it will gradually fall. While the risks this will cause to stability are fairly limited for now, a potential credit rating downgrade before the year is up could cause a damaging shift in market sentiment. T he EU is stepping up the pressure on Greek and Turkish Cypriots to find a resolution to the island's north-south divide. Talks between leaders Demetris Christofias and Dervis Eroğ
lu continue, though there is still no progress to speak of, and a breakthrough before the end of the year - a deadline set by Eroğ
lu when he came into office in April - seems unlikely. A UN report in November will assess the state of play and examine possible next steps, with some sort of formal partition becoming more of a possibility as time wears on. Elections in Greek Cyprus and in mainland Turkey in 2011 will also be influential in the outcome of settlement talks. I nflation is rising at a worrying rate given the slow pace of economic growth. Consumer prices rose 3.5% in September, more than double the eurozone average. A series of tax hikes that will directly raise consumer prices are expected in 2011, and these will have a more permanent impact via the inflation-indexed COLA wage adjustment mechanism . We expect inflation to remain elevated by regional standards over the forecast period, having a detrimental effect on competitiveness. C yprus continues to hold a status as a regional financial hub, due to its strong rule of law, eurozone membership and extremely low corporate tax rate (10%). However, investment activity in Cyprus will continue to be weighed down by the island's political problems and economic imbalances (namely twin fiscal and current account deficits)
, which are a major deterrent for investors. In addition, the traditionally important sector of tourism is suffering from a decline in competitiveness relative to other popular destinations, and faces another very difficult year in 2010. The banking sector - which has been developing rapidly in recent years - has weathered the financial storm so far, but will continue to come under strain from external risks, particular from neighbouring Greece.
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