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Any further measures to support the economy from the impact of the pandemic in 2021 should be targeted, aiming at minimizing the consequences, while reducing the effects on public finances, the Central Bank of Cyprus (CBC) points out in its annual Financial Stability Report for 2020.

It is also noted that medium-term risks to financial stability are high and the CBC is monitoring them closely in order to take measures to reduce potential vulnerabilities in the system.

"While the economy of Cyprus in 2020 was affected by health developments, in 2021 support measures should be targeted in order to mitigate the risks that have been created," it is added.

It is noted that the immediate reaction of the supervisory authorities and governments in 2020 has largely contained the negative effects on the real economy and the CBC considers it important to take advantage of the package of measures that is already underway. At the same time, the CBC says that the withdrawal of the measures should be gradual in order to avoid a cliff effect.

CBC furthermore notes that maintaining the creditworthiness of Cyprus in the investment grade is considered particularly important at a time when the continued support of the economy is necessary.

The CBC also says that the possibility of using government guarantees to provide loans will help boost lending and may mitigate some of the risks of ending the economy support measures, offering liquidity to businesses.

Pre-existing macroeconomic imbalances as well as structural problems in financial sector should be resolved by creating a healthy and competitive economy that will be able to face new crises without the burdens of the past, it also pointed out.

At the same time, the CBC notes that the launch of vaccinations, the new categorization of countries and the latest developments in terms of increased bookings, raise expectations for a recovery in tourism in 2021, with an increase of arrivals compared to 2020, but also for recovery and restart of the economy in general.

The CBC notes that in 2020, support measures have greatly mitigated the economic impact of the pandemic. It is reported, however, that despite the support measures, the health crisis has increased uncertainty in the macroeconomic environment, creating new or reinforcing existing risks.

"In particular, the recession and the slow recovery of the economy may lead to a deterioration in the incomes and balance sheets of the already indebted companies and households, while increasing the risk for insolvent non-financial corporations, with a consequent increase in unemployment," it is noted.

The CBC adds that while low interest rates and ongoing bond purchases by national central banks and the ECB through ECB bond purchase programs make government access to markets easier, further increases in public debt, in particular, from non-targeted support measures may pose risks to its future viability.

It is also noted that the credit institutions of Cyprus, despite the corrections in recent years, have been called upon to deal with the economic impact of the pandemic with an already high level of Non-performing Loans (NPLs), low profitability and structural problems, greatly affecting their ability to provide new loans.

The CBC also notes that the impact on NPLs is expected to come out by 2021. A new wave of NPLs, provisions and losses after the end of support measures in 2021, the CBC continues, should be expected, however this can be reduced with the correct and rapid use of the restructuring tool.

At the same time, it is added, credit institutions may face the challenge of deterioration of credit quality on the one hand and reduced profitability prospect on the other.

Source: StockWatch