Cyprus, well-positioned for pandemic, can manage increased public debt — Fitch

Cyprus’s 2021 budget targets a wider deficit than we had previously expected, but fiscal performance should still be strong relative to regional and ratings peers, Fitch Ratings said in a note released late on Wednesday.

“High public debt is a legacy of the 2012-2013 crisis, but Cyprus’s persistent underlying budget surpluses pre-pandemic, which peaked at 3 per cent of GDP in 2019, and robust GDP growth averaging 4.4 per cent in 2015-2019 increased its capacity to absorb the pandemic shock.

Cyprus’s record of significant fiscal consolidation since its 2012-2013 financial crisis is an important strength for its ‘BBB-‘/Stable sovereign rating, the note said.

A fiscal deficit of 3.2 per cent this year, in line with the 2021 budget, would be narrower than any other non-‘AAA’ rated western European sovereign and below the forecast ‘BBB’ category median of 5.3 per cent. The government’s latest estimate of the 2020 is about 4.5 per cent of GDP on a cash basis, well below the aggregate eurozone deficit of 8.8 per cent of GDP in the European Commission’s Autumn 2020 economic forecasts,” the note explains.

“The Cypriot Parliament adopted the 2021 budget by 29 votes to 26 on 21 January 2021. The budget envisages €48 billion of revenues and expenditure of €7.16 billion, resulting in a deficit of €680 million or 3.2 per cent of GDP. Spending growth was constrained in the first three weeks of 2021 while a temporary budget, in which expenditure allocations were rolled over from a year earlier, was in place,” the note says.

Continuing pressure for increased social spending is a moderate risk, going forward, the note warned.

“The large banking sector remains a weakness relative to ‘BBB’ category peers due primarily to weak asset quality, notably very high non-performing exposure ratios that still weigh on capital and profitability. Cyprus has the highest use of loan moratoria in Europe according to the European Banking Authority (about 55 per cent of private-sector loans at end-September 2020), but this reflects the lack of barriers to granting moratoria and the absence of a state-guaranteed loans scheme, as well as borrower exposure to the sectors most affected by the pandemic,” the note said.