Cyprus aims for budget surpluses but risks remain

Economic outlook is optimistic, primarily driven by tourism and domestic activity

While Cypriot economic growth is expected to remain strong, driven by tourism and domestic investment, the fiscal outlook is exposed to significant risks, rating agency DBRS Morningstar said on Friday.

The agency’s statements about the Cypriot economy were part of a commentary on the country’s new stability programme.

In a publication entitled ‘New Stability Programme Signals Continuity of Fiscal Policy’, the rating agency noted that the new government recently presented the first official medium-term fiscal goals since taking office.

“While the election of President Nikos Christodoulides in February 2023 marked a turning point in Cypriot politics, as his candidacy was not supported by either of the two largest political parties, Disy and Akel, the medium-term fiscal targets signal the continuity of fiscal policy,” the agency said.

“Similar to the projections of the previous government’s budget plan for 2023, published in October 2022, the stability programme 2023-2026, released on May 3 of this year, envisages recurrent budget surpluses and, therefore, a significant reduction in the high burden caused by public debt in the coming years,” it added.

It is also noted that the stability programme aims for an average general government budget surplus of 2.3 per cent during the period 2023-2026.

What is more, the agency stated that the favourable fiscal forecasts are based on the assumption that public tax revenues will continue to be largely boosted by Cyprus’ strong momentum in terms of economic growth.

The agency went on to say that “while we expect economic growth to remain strong, the economic and fiscal outlook is exposed to significant downside risks”.

“Cyprus is one of the few countries in the eurozone currently targeting recurring fiscal surpluses over the medium term,” Vice President of DBRS Morningstar’s Sovereign Group Yesenn El-Radhi explained.

“These favourable fiscal forecasts are not based on spending cuts but rather on the expectation that strong economic headwinds will continue to boost public tax revenues,” he added.

Moreover, El-Radhi noted that “continuation of the favourable economic growth momentum is, therefore, essential to achieve these fiscal targets in the coming years”.

The report also made note of the fact that total public revenue is projected to grow at an average annual rate of 5.7 per cent over the years 2023-2026.

“In turn, this will cover rising public spending, which is expected to reach 5.6 per cent,” the report said.

In terms of economic growth, the report stated that the stability programme expects real GDP growth to average 3 per cent over the period 2023-2026. On the supply side, important service sector activities such as information and communication technology (ICT) and tourism will likely remain the main drivers of growth.

“We expect that the number of tourist arrivals will continue to increase, mainly as a result of the opening of new large-scale tourist facilities in the coming months, including the casino resort of Limassol,” the report explained.

“In addition, domestic investment activity is likely to be supported by the influx of funds from the NextGenerationEU programme in the coming years,” it added.

The agency also said that while its baseline scenario expects growth dynamics to remain favourable, it also acknowledges that the economic and fiscal outlook is exposed to significant downside risks, such as an escalation of the war in Ukraine, as well as higher global financial fragility, which will likely weaken external and domestic demand.

Furthermore, a stronger-than-expected slowdown in economic activity, in turn, will likely weigh on government tax revenues.

Finally, the agency concluded by saying that a possible new economic shock may require a strengthening of government support measures, similar to those enacted during the Covid-19 pandemic.