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Cyprus

Sensitivity analysis shows public debt sustainable, finance ministry says

Cyprus’s public debt is deemed sustainable and will continue the downward path it entered in 2015, in all four sensitivity analysis scenarios, the finance ministry said.

In the basic scenario, the government debt, which fell to a revised 107.1 per cent of economic output last year after peaking at 107.5 per cent in 2015, is expected to drop to 99.7 per cent in 2018, the finance ministry said in its fiscal risks report, dated September 2017. Under the same scenario, the public debt is expected to further fall to 94.6 per cent of gross domestic product (GDP) in 2019 and to 88.8 per cent the following year.

The first scenario provides for an increase in the annual interest rate of public debt by 0.5 percentage points over the next three-year period, the second a slowdown of economic growth by also 0.5 per cent, the third a reduction of the primary surplus generated by 0.5 per cent of economic output and the fourth a combination of the other three scenarios with a deviation of each variable by 0.25 percentage points, the ministry said.

While all four scenarios allow for a reduction of public debt as a percentage of GDP, the fist scenario, that provides for increase in borrowing costs, leads to a gradual decline of public debt to 91.9 per cent by 2020, the largest drop among all four scenarios, the ministry said. The economic slowdown scenario, on the other hand, will allow public debt to drop to 101.3 per cent by 2020.

Under the third scenario, the reduced primary deficit will allow the government to reduce debt to 96.2 per cent in three years, the finance ministry said. Last, under the fourth scenario, which provides a mixture of deviations from base-scenario, the government will be in position to reduce its debt to 97.4 per cent.

In September, the ministry revised its economic growth forecast to 3.6 per cent from a previous 3 per cent. The economy is expected to expand next year around 3 per cent and growth is forecast to slow down to 2.7 per cent in 2019 and 2020. The government is expected to generate a fiscal surplus of 1 per cent of GDP next year compared to 0.9 per cent this year. In 2019, it is expected to post a 1 per cent increase and a further 1.1 per cent the following year.



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