NICOSIA, May 27 (Xinhua) -- European Stability Mechanism (ESM) chief economist Rolf Strauch urged Cyprus on Monday to continue applying prudent economic policies and keeping fiscal buffers to safeguard against external risks that could affect the growth of its small and open economy.
Strauch also told the Cyprus News Agency in an interview that despite the reduction achieved, non-performing loans in the Cypriot banking system, along with high public and private debt, remain the country's key challenges.
He noted that they amount to 50 percent of the island's GDP and continue to weigh on the economy.
Cypriot banks managed to bring non-performing loans down to 10 billion euros (11.2 billion U.S. dollars) or 30.3 percent from a peak of 28 billion euros, or 52 percent of the total loan portfolios, following the 2013 economic crisis and the resolution of the banking system.
He said ESM, the international financial institution set up by the euro area member states, will be monitoring the ESTIA (home) subsidy scheme designed to help non-performing home owners, "to see if it ensures a sound payment culture".
He did not share concerns that offloading non-performing loans may lead to mass foreclosures and auctions, as banks have to comply with regulatory requirements and noted that the ESTIA scheme has been put in place foremost to protect home owners.
"Cyprus is one of the success stories of ESM," Strauch said, in referring to the ESM bailout of Cyprus.
But growth is projected to decelerate to about 3 percent, "closer to the country's long-term growth potential, as part of growth moderation", he added.
This "is not a Cyprus-specific phenomenon", or a reflection of economic weakness, he said.
"We see this moderation in growth as part of the normalization phase after years of 'above-potential growth', leading to a cooling down also for other euro area countries and for the euro area as a whole," he said.
He further praised the Cypriot authorities for "doing a good job" in the post-crisis years in attracting investment and increasing employment, which are important drivers of growth, but he added that vulnerabilities remain.
"A small and open economy such as Cyprus could be exposed to external risks, such as trade wars, Brexit, and fluctuations in currencies like the Russian rubble and the Turkish lira," he warned.
"These external risks may affect the development of the country. From that perspective, there is good reason to be prudent in terms of policies and to keep fiscal buffers," Strauch advised.
The ESM official also praised Cypriot authorities for their initiatives to diversify the economy, boosting sectors that so far have been underdeveloped, such as education and energy.
Strauch said that countries that are able to diversify their economic structure, reduce vulnerabilities can stay on a good growth path.
