‘Sta­ble’ out­look, but no re­cov­ery be­fore 2016

Financial Mirror (Cyprus) - - FRONT PAGE -

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

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