Cyprus Mail

Government debt expected to decline to 80% of GDP by 2020

By Stelios Orphanides

The public debt management office said it expected that a combination of positive, albeit low growth, and fiscal surpluses, would lead to a “rapid decline” of Cyprus’s public debt to 80 per cent of economic output by 2020 from the current 100 per cent plus.

“Addressing the domestic banking sector’s weakness relating to the high levels of non-performing loans is the biggest challenge, which, despite key regulatory measures put in place, will take few years to improve noticeably,” the PDMO, a division of the ministry of finance said in its medium-term strategy for 2016 to 2020. “Unemployment will remain high and above acceptable levels”.

The PDMO said that a number of risk factors and challenges “which are manageable” continued to exist. “Risks related to public finances may emerge even as measures are taken to address them pre-emptively,” it said. “The budgetary impact of direct and indirect contingent obligations such as government guarantees, obligations of general government departments, and pending lawsuits, may prove higher than expected. With respect to markets, there is a risk of Cypriot government bonds being excluded from the European Central Bank’s monetary operations, which may cause upward pressure to borrowing costs”.

The government, which saw its debt rise in 2015 to €18.9bn from €18.8bn, or 108 per cent of the economy the year before, is facing more than €1bn in loan maturities this year and less than €1bn next year and 2018, when Cyprus will start repaying a €4.5bn loan from Russia granted in late 2011 and restructured following the 2013 banking crisis. In 2019 and 2020, debt maturities exceed €2bn and €1.5bn respectively.

On Thursday, the yield of the Cypriot 10-year government bond, issued in October at an average yield of 4.25 per cent, rose for the first time to 4 per cent since early November, after falling as low as 3.7 per cent in December.
Overall government guarantees in March 2015 stood at €3.1bn, according to the PDMO. The government issued guarantees totalling €1bn to Bank of Cyprus, €0.7bn to sewage boards, €0.5m to state-owned power company EAC, €338m to local authorities, €285 to the European Financial Stability Fund, €200m to various individuals — as part of the government’s social policy — and €77m to companies.

Average government debt maturity exceeds 8 years. At the end of 2015, 47 per cent of outstanding debt had a floating rate, the PDMO said. “The largest portion of floating rate debt stock concerns debt from the European Stability Mechanism and the International Monetary Fund”.

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