Moody’s Investors Services said that despite the Cypriot economy’s robust growth the strong fiscal performance faces challenges related to its small size, relative lack of diversification and high levels of indebtedness.
“Cyprus’ growth momentum, coupled with strong fiscal performance, helped to reduce the country’s debt-to-GDP (gross domestic product) ratio in 2016 for the first time since 2008,” Moody’s senior vice president Sarah Carlson, who authored an annual credit analysis report on the island’s economy, was cited as saying on Monday. “We expect a decline in the debt-to-GDP ratio to close to 100 per cent by the end of this year. The country has regained capital market access and has a cash buffer, which will help to cover financing needs next year”.
The report, titled Government of Cyprus – Ba3 Positive, Annual Credit Analysis, said Cyprus’ economic output, expected to increase 3.5 per cent this year, is forecast to expand 3.2 per cent in 2018, for the fourth consecutive year after exiting a prolonged recession in 2015.
The report does not include any rating action. Moody’s last upgraded Cyprus’ sovereign credit rating two years ago by two notches to B1, which is four grades into the speculative area or junk.
“Although Moody’s expects household private debt servicing to result in a deceleration in the growth of private consumption, it is still likely to be the main driver of the ongoing expansion, supported by favourable developments in the labour market and the important tourism sector,” the rating company said. “After the strong fiscal consolidation efforts realised in recent years, the government’s 2017-19 medium term fiscal plan assumes a broadly neutral fiscal stance, with a slight deterioration in the general government budget balance pencilled in for 2018”.
The rating company expects the government to generate a fiscal deficit of 0.4 per cent of economic output this year, compared to a fiscal surplus of twice as much the government has forecast by, it said.
A 2.1 per cent primary surplus will help reduce public debt which fell to below the 100 per cent level three weeks ago with the partial early repayment of debt to the Central Bank of Cyprus.
“Cypriot government debt remains affordable, reflecting the very large share of official sector creditors in the total debt stock,” Moody’s said. “Interest charges took up only 6.6 per cent of general government revenue in 2016, down from a peak of 9.2 per cent in 2013, and this is likely to stay just below 7 per cent over the next two years. In Moody’s central scenario, public debt will decline to around 92 per cent of GDP by 2019”.
“However, Cyprus’ debt metrics still remain vulnerable to a negative growth, fiscal or a combined shock scenario,” with the island’s economy being “susceptible to every risk” given the vulnerabilities of the banking sector which still struggles with a non-performing loans ratio of around 45 per cent, Moody’s said.
“The positive outlook on Cyprus’ sovereign rating reflects Moody’s view that improvements in economic resilience and fiscal strength are likely to be sustained,” the credit rating company added.