War sanctions may cost 2% of Cyprus GDP

War sanctions may cost 2% of Cyprus GDP

Cyprus stands to lose up to 2% of its gross domestic product in 2022 if the Russian flight ban remains in effect throughout 2022, DRBS Morningstar rating agency said on Monday, noting that the war in Ukraine will negatively impact growth this year, although “it should not derail Cyprus’ medium-term prospects.”

In a commentary, the agency said that “the introduction of sanctions and counter-sanctions due to Russia’s invasion of Ukraine has increased the downside risks to otherwise strong medium-term economic prospects for Cyprus,” adding that the main transmission channels for Cyprus are through tourism revenues and higher energy prices.

“DBRS Morningstar estimates that Cyprus stands to lose 1.5-2% of GDP in 2022 if the airspace closures remain in place for the whole year. The impact could be much lower if the restrictions are lifted before the summer season or if Russian travelers are able to find alternative routes to Cyprus,” the agency said.

It noted that the economic benefits from an improving pandemic situation in Europe and the stimulus provided by EU funds will mitigate the risks and continue to underpin Cyprus’ economic recovery.

“DBRS Morningstar continues to believe Cyprus’ medium-term economic prospects remain solid and the country should be well placed to manage and adjust to the situation, contingent on the duration and depth of the crisis as it pans out,” it added.

Recalling that Russia has been Cyprus’ second tourism market, DBRS said that given the importance of Russian inbound tourism, the flight bans could curtail around 20-25% of the overall tourist inflows to Cyprus in 2022, although the agency expects the Cypriot tourism industry to attract tourists from other source markets instead, including from the UK.

“Even if the sanctions affecting flight availability are short-lived, the inflows of Russian tourists to Cyprus are expected to be severely impacted by the massive effect of the sanctions on the Russian currency and its economy,” it said.

Furthermore, DBRS Morningstar noted that, although Cyprus’ economy has proven more resilient than expected with the economy recovering faster than expected, “the European Commission’s growth forecast for Cyprus of 4.1% in 2022 published in February before the invasion now appears optimistic.”

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