Cyprus Mail

Eurobank warns Cypriot government of reform complacency

Eurobank Cyprus warned that reform complacency may result in Cyprus missing out on further sovereign rating upgrades, after entering “a virtuous circle” following steps to consolidate public finances and economic growth.

“Gross domestic product growth marked the seventh consecutive positive reading on a both quarterly and annual basis after a three-year recession, confirming the economy is finally out of the woods,” the unit of the Greek bank said in its emailed quarterly economic monitor.

Still, “the risk of complacency following the exit from the adjustment program is material,” as the positive outlook, which implies an upgrading in the next months, requires the government to continue with structural reforms, Eurobank said. The warning came weeks after the Cypriot parliament rejected a bundle of proposed reforms aiming at reforming Cyprus’s civil service human resource management and linking public payroll to economic performance.

The Cypriot economy expanded 2.8 per cent in the third quarter and a seasonally adjusted 2.9 per cent compared with the respective three-month period of 2015, and 0.7 per cent compared with the second quarter, among the highest annual and quarterly growth rates reported in both the European Union and the euro area. The government forecast the economy to expand 2.8 per cent in 2017 after projecting a similar rate for last year.

Following the upgrade of Cyprus’s rating by a notch to BB- by both Standard & Poor’s and Fitch Ratings, with the latter placing it on a positive outlook, and Moody’s Investor Services also changing the outlook to positive from stable and maintaining the rating at B1, all ranking it below investment-grade, the island’s economy is the only one “in the euro area periphery whose outlook is positive,” Eurobank said. The bank added that improvement of the banks’ loan portfolio could result to further upgrades.

“There are a few pending important structural reforms of the economic adjustment program, which would allow the Cypriot economy not to backtrack,” the lender said. “As time moves on and the economy improves, it becomes increasingly unlikely the bill will be voted,” it said with respect to the civil service reform rejected by the opposition.

In its bulletin, co-authored by former Greek finance minister Gikas Hardouvelis, who also teaches economics at the University of Piraeus, Eurobank backed Cyprus’s government following its recent war of words with European Commissioner Pierre Moscovici, who warned finance minister Harris Georgiades of fiscal relaxation in November. Moscovici had criticised the primary balance of 2 per cent of economic output included in the 2017 budget and proposed increasing the target by 1 percentage point in order to accelerate government debt reduction.

“Because of prudent early action during the Economic Adjustment Program and early attainment of the fiscal targets, Cyprus today is rewarded with a somewhat looser fiscal path, which is conducive to growth,” Eurobank said.

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