FINANCE minister Harris Georgiades has every right to feel pleased Cyprus’ sovereign debt was upgraded to investment grade by Standard and Poor’s on Friday, after six years of junk status. The government had lost access to the markets in May 2011 when yields on its bonds rocketed and were eventually downgraded to junk status at the beginning of 2012, by Standard and Poor’s. By mid-2012 the other two rating agencies had done the same, forcing the Christofias government to apply for assistance to the EU.
There was a cautious return to the markets in 2014, although for the first issue the interest was in excess of 4 per cent. Two more issues followed the next year, although the bond still had junk status. From Friday, this is behind us, with Standard and Poor’s upgrading Cyprus BBB- which is investment grade. This is also a vote of confidence in the economy, acknowledgment that public finances have been put on a healthy footing and that the banking sector no longer poses any risk.
After the good news, the Public Debt Management Office announced the issue of €1 billion 10-year bond which will be used for the refinancing of existing debt. Georgiades made it clear on Monday that the loan was not needed to cover deficits as the government was producing a surplus. He also predicted that every new loan would be at a lower rate than the previous one. When Cyprus returned to the markets in 2014 the rate was at 4.75 per cent and has steadily fallen since then.
All the economic indicators show a positive outlook. The growth rate is expected to be at 4 per cent this year while the fiscal surplus is forecast to reach 3 per cent of GDP, almost double that of 2017. The Co-op fiasco has increased the public debt, but this was the only minus point of the government’s handling of the economy. The only danger facing the economy now is complacency, for which our politicians have a tendency. This has been evident in several government decisions, such as the return of public sector wages to pre-crisis levels and ongoing new appointments to the public service among other things.
Standard and Poor’s also warned about the dependence of the economy on tourism and construction, both of which are booming at present. Construction and, to a lesser extent, tourism have traditionally driven growth in Cyprus, but it is a sign of the complacency we spoke about that we are still relying on these rather than trying to develop other sectors of the economy. Developing new sectors should be the priority now.