Boston, MA -- (SBWIRE) -- 05/28/2014 -- Cyprus' major economic headwinds and ongoing territorial dispute with Turkey will remain dominant themes in policy-making over the coming years. Austerity measures and several years of economic decline could increase social tensions and give rise to marginalised political undercurrents, while efforts to develop offshore mineral resources are set to raise tensions with Turkey within a delicate geopolitical context.

Cyprus appears to be past the worst of its brutal recession. Nonetheless, we do not forecast annual economic expansion until 2016, as credit growth remains impaired, public austerity deepens, and the internal devaluation process keeps a lid on nominal and real wages.

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Although the Cypriot government's fiscal consolidation plan will begin bearing fruit by 2015-16, with a reduced deficit, a budget surplus is unlikely to be posted anytime soon. With slow economic growth ahead and chronic budget deficits, it is likely that Cyprus's debt sustainability will be called into question again at some point in the next few years.

Major Forecast Changes

We have revised our 2014 real GDP growth forecast to -4.0% from -5.3%.

We changed our nominal budget deficit forecast for 2014 from 4.4% of GDP to 5.0%.

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