The major sectors of Cyprus business are expected to recover within two or three quarters, according to a credit rating report released by Moody’s this week.
“Tourism-related construction activity will likely remain below pre-crisis levels over several quarters, while residential construction will be more resilient. We also expect the performance of the business services sector to be robust. As a result of these trends, we expect a gradual economic recovery in the second half of 2020 and in 2021.”
Significantly, overall, government debt, which rose more than 100 per cent with respect to GDP in 2020 due to support measures for households and businesses in the crisis, will fall back by 2021, Moody’s predicts (the chart below shows various scenarios, but the decline takes place under each one).
If Cyprus can continue reducing public and private debt, with particular reference to non-performing loans at banks, Moody’s will consider upgrading the country’s Ba2 positive credit rating, the report says.
“The credit profile of Cyprus (Ba2 positive) reflects its small but wealthy economy, and improvements in economic resilience in recent years. It also incorporates the government’s fiscal outperformance in the wake of the country’s banking crisis, with strong growth trends and primary surpluses generating positive debt trends,” the report notes.
The positive factors in the Cyprus economy are also significant.
“The positive outlook is driven by two main factors. First, non-performing exposures (NPEs) have declined substantially in the recent past, and we expect policy actions and efforts by bank to tackle the high stock of NPEs to result in further improvements over the next two years, driven by NPE sales and the launch of the Estia programme. Second, we expect that debt reduction will resume at a sustained pace after the 2020 coronavirus crisis. At this point, we anticipate that the increase in debt that is related to coronavirus will be transitory, in part because of Cyprus’s large fiscal surplus going into the pandemic.
The report notes that the lockdown, which weighed on productive capacity and household consumption, will exacerbate the impact on the tourism sector. “However, support measures from the authorities, which include income support for households and small businesses, will mitigate some of the negative effects of the pandemic on the economy,” according to the report.
Cyprus’s very high consolidated private sector debt represents the most important vulnerability for the country. Private sector debt continues to pose significant risks for the economy.
Given the support packages, as well as lower revenue from the economic shock, we now forecast a budget deficit of 9.1 per cent of GDP in 2020, compared with a surplus of 1.7 per cent of GDP in 2019. As a result, we forecast a strong rise in the debt burden in 2020, reaching 121.4 per cent of GDP.
In 2021, the smaller deficit and the drawdown of cash reserves accumulated in 2021 will allow debt to decline at a rapid pace, Moody’s says.
Cypriot government debt remains affordable, Moody’s points out, reflecting the very large share of official sector creditors in the total debt stock (36 per cent as of March 2019). Interest charges were only 6.1 per cent of general government revenue in 2019, down from a peak of 10.4 per cent in 2013.
Debt affordability will remain favourable over the coming years despite the projected increase in debt, as Cyprus benefits from the low interest rate environment.
Source: Cyprus mail