DBRS Morningstar sees risks for Cyprus

DBRS Morningstar sees risks for Cyprus

Rating agency DBRS Morningstar left its baseline macroeconomic scenario unchanged for Cyprus, but sees a risk of deterioration, especially for Europe following the Russian invasion in Ukraine and the ensuing sanctions imposed on Russia by the West.

The Canada-based agency said its baseline projection for Cyprus in 2022 is for its gross domestic product to grow at a rate of 4.1%, which remains unchanged compared with the December 2021 estimate. The agency added that its projection for 2023 was marginally reduced by 0.1% to 3.3%.

With regard to unemployment, DBRS Morningstar said its estimate remains at 6.9% for 2022 while the rate for next year was revised to 6.4% down by 0.1 percentage points from its previous projection.

“Baseline forecasts have deteriorated modestly for most economies over the past quarter,” the agency said, adding it expects “some additional deterioration in growth forecasts for 2022 over coming months, particularly in Europe, as the Russian invasion of Ukraine has added another major source of uncertainty.”

Although Russia and Ukraine account for less than 2% of global GDP, the agency said that these two countries “play outsized roles in several important global markets, including oil and gas, agriculture, fertilizer and metals. Commodity prices have risen, contributing to inflation and weakening the growth outlook.”

It also added that the war and associated Western sanctions have added to supply chain disruptions, and the impact on global growth is likely to increase in parallel with the length and scope of the conflict, while the continuing pandemic remains a source of uncertainty.

“The impact of the Russian invasion of Ukraine could intensify in a variety of ways,” cautioned Thomas R. Torgerson, co-head of Sovereign Ratings at DBRS Morningstar. He warned that “if the global environment prolongs and propagates additional price shocks, we could ultimately see a period of low growth with high inflation. This could subsequently lead to larger interest rate hikes as central banks seek to rein in inflation expectations.”

Meanwhile European Central Bank head Christine Lagarde will visit Cyprus at the invitation of the Central Bank of Cyprus governor and ECB Governing Council member Constantinos Herodotou and meet Cypriot President Nicos Anastasiades on Wednesday.

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