The economic sentiment in Cyprus has shown a declining trend for the second consecutive month in March. The Economic Sentiment Indicator (ESI) was notably impacted by weakened business confidence across all sectors.

As reported by the University of Cyprus' Economics Research Centre (CypERC), there was a decrease in the ESI by 1.2 units in March compared to February, bringing it down to 102.1 units. This decline is attributed to the faltering business confidence in all sectors, characterized by a general pessimism about future business activities.

Despite observing some improved assessments of the current business situation in March, the CypERC notes that the Services Confidence Indicator has declined. This is due to continuing negative forecasts about future turnover among firms. Similarly, the Retail Trade Confidence Indicator experienced a downturn, primarily because of increasingly pessimistic expectations regarding future sales. Additionally, the Construction Confidence Indicator saw a reduction as firms adjusted their employment plans downward.

The Industry Confidence Indicator suffered a significant fall in March, dropping by 5 points. This decline was driven by negative perceptions of the stock levels of finished products, possibly reflecting a reduced demand for manufacturing goods. Moreover, production expectations have reached a 14-month low.

On a more positive note, the Consumer Confidence Indicator saw an increase in March. This rise indicates a slight reversal from the pessimistic views on personal financial situations and the broader economic conditions that were prevalent in February. However, the CypERC also points out that consumers' intentions to make major purchases have weakened in March.

Furthermore, the economic uncertainty indicator also decreased for the second consecutive month, reaching 29.5 units. Despite this decrease, it remains higher than the level recorded in March 2023, the CypERC concludes.

The state budget deficit of Cyprus for 2023 saw an increase of €80 million compared to the deficit recorded in 2022. This information comes from the 2023 Fiscal Report of the Republic of Cyprus, which was recently submitted to the House of Representatives.

In detail, the final state budget deficit for 2023 was €0.98 billion, up from €0.90 billion in 2022.

Total revenues for 2023, excluding loan withdrawals and repayments, amounted to €8.72 billion. This represents an increase from the €8.04 billion reported in 2022. On the expenditure side, excluding outflows related to loan repayments and issuance, the total for 2023 was €9.17 billion, an increase from €8.20 billion in 2022. Consequently, the state budget deficit before net borrowing flows was recorded at €0.45 billion for 2023, compared to €0.16 billion in 2022.

When considering inflows from loan withdrawals and repayments, which remained consistent at €1.22 billion for both years, and outflows for repayments and loan issuance (€1.75 billion in 2023 and €1.96 billion in 2022), the final state budget deficit for 2023 amounted to €0.98 billion, compared to €0.90 billion in 2022.

The primary source of state revenues for 2023, excluding loan-related inflows, was taxation, amounting to €7.33 billion, which accounted for 84% of the total revenues. Of this, indirect taxes made up 47% and direct taxes 37%.

State expenditures were mainly allocated to personnel wages, pensions, and grants (€3.20 billion), social benefits (€1.80 billion), and transfers (€1.36 billion).

The total amount of borrowing, excluding internal government borrowing, reached €22.18 billion as of December 31, 2023. This is a slight decrease from €22.87 billion recorded on the same date in 2022.

In the last quarter of 2023, net demand for corporate loans in Cyprus continued its downward trend, a pattern that has been consistent since the first quarter of 2022, albeit at a slower pace than in the previous quarter.

The bank lending survey conducted by the Central Bank of Cyprus (CBC) for Q4 2023 revealed that while the net demand for corporate loans was declining, housing loans remained steady, breaking a continuous negative trend that started in early 2022.

This negative trend in loan demand is largely attributed to the high level of interest rates, as noted by the CBC. Interestingly, the survey indicates an increase in net demand for corporate loans specifically aimed at financing fixed investments. This uptick could be a reflection of expected continuous growth in domestic consumption and an increased need for refinancing or debt restructuring. This demand has somewhat counterbalanced the overall reduction in corporate lending demand.

The survey further outlines that the net reduction in total demand for corporate loans in Q4 2023 was primarily due to a decline in loans taken by small and medium-sized corporations. In contrast, demand from larger firms remained stable.

Regarding housing loans, the CBC observed that the downward trend in net demand, which had been consistent since the beginning of 2022, was interrupted in Q4 2023.

The CBC also noted that the negative impact of rising interest rates has been somewhat mitigated by the banks' strategy of offering competitive interest rates to increase their share in total lending.

For consumer lending, the trend continued downwards in the last quarter of 2023, surpassing the expectations set in the previous quarter. Factors contributing to this decline include the deterioration of consumer confidence, higher interest rates, and a further decrease in loan demands for durable consumer goods. Additionally, the Q4 2023 survey indicated that loan provision criteria remained consistent for businesses but became stricter for household loans.