Geopolitical crises "hold the economy and public finances by the throat"

• At the forefront: the repercussions of foot-and-mouth disease, the Vassilikos terminal, and the GSI

• The GHS (General Healthcare System) remains a continuous, ticking burden on public finances

An unprecedented "cocktail" of risks for public finances and, by extension, the economy is highlighted in the Strategic Framework for Fiscal Policy (SFFP) released yesterday by the Ministry of Finance for the years 2027–2028.

According to the Ministry of Finance, these risks could significantly affect the baseline macroeconomic scenario upon which fiscal targets are built.

At the absolute forefront of these risks are the unrelenting geopolitical developments in the Middle East and Ukraine, the growing burden placed on public finances by the GHS, the ongoing negative repercussions on livestock farming from foot-and-mouth disease, and the pending judicial decisions regarding the Vassilikos gas terminal.

These are the very risks that Offsite and Brief have pointed out across numerous articles well ahead of time…

Specifically, according to the Strategic Framework for Fiscal Policy, significant risks stem from geopolitical developments in Ukraine following the invasion by Russia, as well as the protracted war in the Middle East.

Their outcome, it is noted, will largely determine the trajectory of the global economy over the next few years.

Additionally, in the event that a global trade war erupts, the growth prospects of the Cypriot economy could be impacted, primarily in an indirect rather than direct manner.

The potential addition of new Cypriot legal and natural persons to the sanctions lists of the U.S. and the United Kingdom could also impact the services sector in Cyprus.

Risks also arise from:

• The potential spread of foot-and-mouth disease, carrying negative implications for the production and export of dairy products.

• The termination of operations at the Vassilikos liquefied natural gas terminal and the ongoing International Arbitration in England (non-liquidation of Consortium guarantees, potential demands for the repayment of government-guaranteed loans, and the return of subsidy amounts to the European Commission).

Among the risks highlighted in the Strategic Framework for Fiscal Policy is the gradual implementation of the Compensation Scheme for Bailed-in Depositors and Holders of Debt Securities of the Bank of Cyprus and Laiki Bank through the National Solidarity Fund.

Risks could also emerge from the Republic of Cyprus's participation, depending on the decisions to be made, in the Crete-Cyprus Electricity Interconnection project (Great Sea Interconnector).

Given the geopolitical developments, the sanctions imposed on legal entities of Russian interests as well as natural persons, the impact on the real economy through rising prices, and the potential increase in the ECB's key interest rates, an increase in non-performing loans (NPLs) within the banking sector cannot be ruled out.

It is noted, however, that significant steps are being made toward effectively reducing NPL levels, while the banking system is supported by a resilient capital position and excess liquidity.

Furthermore, a potential risk is the burden on public finances from the GHS, primarily through the deficits of the State Health Services Organisation (SHSO), which the state may cover during its first six years of operation, activities that have been heavily burdened due to the pandemic.

The Ministry of Finance clarifies that macroeconomic forecasts are based on only a partial inclusion of the impact of investments expected to be implemented under the Recovery and Resilience Plan.

Additional new investments beyond the Recovery and Resilience Plan are not fully factored into the baseline scenario, as it is difficult at this stage to quantify their annual impact.

These investments relate to the energy, health, and education sectors.

The SFFP 2027–2029 was prepared taking into account both current economic developments in the Cypriot economy and the macroeconomic forecasts and fiscal targets that have been established.

Source: Brief