Cyprus Mail

Reforms bringing results, Cyprus says after ratings upgrade (updated)

Reforms bringing results, government says after ratings upgrade
ECONOMIC reforms are starting to yield results, the government said yesterday after one credit-rating agency upgraded its rating and a second its outlook for the country.
“Government efforts to reform the economy are beginning to show tangible results… this effort must clearly continue,” deputy government spokesman Victor Papadopoulos said.
Standard and Poor’s on Friday raised Cyprus’ credit rating a notch to B+, reflecting what it said was the island’s strong commitment to a reform programme and a budgetary performance exceeding its expectations. Fitch, which rates Cyprus B-, revised its outlook to positive. The other major agency, Moody’s, rates it Caa3. All these ratings are well below investment grade.
Fitch said that “developments in public finances continue to materially exceed Fitch’s previous expectations.”
“The fiscal deficit in the first half of 2014 was smaller than projected, reflecting a combination of higher tax revenues and lower-than-expected expenditure across most items,” Fitch’s report said.
Smaller budget deficits also significantly improve public debt dynamics, according to the agency, and the government’s debt-to-GDP ratio is now expected to peak a year earlier – in 2015 – and decline more rapidly than under previous forecasts.
Although the economy performed “better than expected” in the first six months of 2014, economic conditions remain challenging as the output continues to decline.
“GDP is likely to contract by 3 per cent at most this year, which is less severe than Fitch’s April projection of a 3.9 per cent drop,” the report said.
That is because “the tourism sector and private consumption continue to be more resilient than expected,” as “households have been spending out of their savings.”
Still, Fitch warned that household spending levels may prove unsustainable.
The island was shut out of international capital markets in 2011 because of budget problems and banks’ exposure to debt-saddled Greece, came close to bankruptcy in 2013.
It was pulled from the brink with a €10 billion lifeline from the European Union and International Monetary Fund, and is now following a three-year programme that has included banking sector reform, streamling spending and privatisations.
Although Cyprus has won plaudits from lenders for making painful economic changes, the IMF recently warned that reform fatigue appeared to be setting in after delays in approving an adequate framework for mortgage foreclosures.
Lenders are withholding a new tranche of aid, worth about €433 million, until that is settled.
Fitch also waded into the foreclosures legislation saga, indicating it could be a key “negative sensitivity,” meaning it could throw the programme off track, with unpredictable consequences on the banking sector – already facing significant risks with mounting non-performing loans, despite some “signs of stabilisation” – and the economy at large.
Nonetheless, Fitch expects the delay in disbursing the latest IMF tranche to be resolved by early next year.
The contentious foreclosure legislation has been referred by President Anastasiades to the Supreme Court citing unconstitutionality, and a ruling will be issued on October 31.

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