Cyprus on track with adjustment, risks include Ukraine: IMF (updated)

Long queues for ATMs as the banks remained closed for nearly two weeks
By a staff reporter
TACKLING the increasing problem of non-performing loans (NPL) is a key challenge facing Cyprus’ banks, the International Monetary Fund (IMF) said in a report published yesterday as it urged the speeding up of a “strong legal framework to facilitate foreclosures”.
The IMF report said the banks need to focus on dealing with the high level of NPLs, further normalising payment flows, maintaining fiscal prudence, and stepping up the implementation of the ambitious fiscal structural reform agenda.
It said the banking sector was showing signs of stabilisation but the outlook remained challenging, with rising unemployment and falling credit, and particularly the upward spiral in non-performing loans.
Non-performing loans (NPLs) in the island’s banking sector, including co-ops, rose to €27.5b in January, compared with €26.9b the previous month, Central Bank data showed last month. NPLs in commercial banks reached 41.7 per cent, or €21.2b, compared with €20.8b in December 2013. The respective figure for co-ops was 47.5 per cent, or €6.4b, compared with €6.04b at the end of the year.
“Risks to programme implementation remain significant, including due to remaining financial sector vulnerabilities and diminished political support following the breakup of the governing coalition,” the IMF report said.
To enhance confidence in the financial sector it said the authorities should promote further measures on governance of banks and strengthen supervision, including close monitoring of progress in implementation of the restructuring plans.
It said the authorities had implemented a code of conduct and an overall framework for managing arrears, and banks and co-ops had created specialised units for dealing with problem loans.
“Ensuring that financial institutions have adequate policies and operational ability to halt and reverse the trend of deterioration of their assets are critical to successful restructuring and long-term viability,” said the report. “It is equally important to apply as soon as possible a strong legal framework to facilitate foreclosures,” it added.
Parliament is currently debating the issue with a view to protecting first-home owners but it is believed that thousands of foreclosures are already underway.
Yesterday’s report, which followed an IMF review of the island’s economy after last year’s bailout, said that while deep, the recession in 2013 was not as severe as anticipated.
Growth projections remain unchanged, with a deep contraction expected in 2014 and a modest and credit-less recovery taking hold in mid-2015, the IMF said.
Cyprus received a €10 billion bailout from the European Commission, the European Central Bank and the IMF, known as the troika, and has been subjected to three evaluations so far by its lenders.
The IMF said the programme was on track and fiscal targets were met with considerable margins – delays in the implementation of structural reforms have recently been overcome.
Growth projections for 2014 and beyond remain unchanged, and given limited new data for this year, the 2014 growth projection was maintained at – 4.8 per cent.
“This is consistent with a slowing rate of output decline during this year, as the uncertainty and immediate effects of the crisis are wearing off, domestic payment restrictions are gradually lifted , and the negative fiscal impulse declines relative to last year.”
The IMF said both private consumption and investment were expected to continue to contract, albeit at a lower rate than last year, with the contribution of the foreign balance moderating.
The modest recovery, projected to take hold by mid-2015, is expected to be credit-less, led by tourism and other service sectors, which are relatively less indebted, exhibit lower NPLs, and are likely to finance activity and exports through generation of positive cash flow.
As regards unemployment and inflation it is noted that they were revised down modestly.
In 2014, the average unemployment rate was revised down to 19.2 per cent from 19.8 per cent to account for the 2013 outturn and for the deceleration in the rate of increase in recent months.
The IMF suggested that a change in depositor sentiment, in the context of important relaxations of payment restrictions underway, could risk destabilising the system and exacerbating the recession.
The Ukraine crisis could also weigh in on the economy through a flight in capital from non-resident depositors of foreign banks in Cyprus, which may affect the business service sector.
On the upside, if trends of economic activity observed in the second half of 2013 continue, growth in 2014 and beyond could be better than anticipated, the IMF said.