‘Stable’ outlook, but no recovery before 2016

Caa2/NP. In both cases the rise is in line with the change in the government bond rating.

Supporting the rating upgrade, Moody’s said Cyprus’s fiscal metrics have exceeded the targets set with the Troika of international lenders (EU, IMF and ECB): in 2013, the primary deficit fell to 2.0% of GDP versus its target of 4.2% in the original economic adjustment programme. Most of the measures aimed at permanently reducing the deficit were included in the 2013 budget, and resulted in significant fiscal consolidation of 7.5% percentage points of GDP over 2013-14, according to IMF data.

“The fact that the economic contraction in 2013 and 2014 was not as severe as initially expected under the programme also contributed to the government’s ability to outperform fiscal targets,” the rating agency said.

“In Moody’s view, the economic and fiscal outperformance increases the likelihood of the government achieving the rest of its medium-term fiscal consolidation targets, e.g. reaching a primary surplus of 4% of GDP in 2018, and thereby succeeding in its objective of putting debt on a more sustainable path.”

Moody’s also estimates that the government’s fiscal deficit will likely come down to around 3% of GDP in 2014, from 4.9% in 2013 and 5.8% in 2012, and that the primary balance will improve by 2 percentage points in 2014, generating about 0.1% of GDP in surplus. This estimate assumes a contraction of the economy in 2014 by 2.5% in real terms and tight budget execution through 2014 on both expenditures and revenues. It also takes into account the impact of the fiscal measures enacted in 2013, including an increase in the corporate tax rate to 12.5% from 10% and the neardoubling of the withholding tax on interest to 30%, as well as the rationalisation of expenditures.

Comparing the budgeted revenue with the collected one, the government’s budget forecasting has proven prudent, says Moody’s. For instance, in the government’s budget for 2015, revenue (net of borrowing) for 2014 has been revised up by 5.6% compared with budgeted levels, with direct and indirect taxes having been revised up by 2.6%.

Under the rating agency’s baseline scenario, “assuming a modest and gradual economic recovery from 2015-16 with growth progressively rising to around 2% over the medium term, government debt is expected to peak at around 110% of GDP in 2015, before slowly reversing. Under such scenario, we assume that the EUR 1 bln loan-to-assets swap that the Ministry of Finance intends to complete with the Central Bank will proceed.”

The second driver for the Moody’s upgrade is the improvement in the stability