Cyprus economy to grow 1.6%, says Moody’s

Moody’s Investors Service expects the Cyprus economy to grow 1.5 per cent in 2016 after growing 1.4 per cent in 2015 ,with the government posting a fiscal deficit of 0.5 per cent of economic output in 2016 and a 0.1 per cent surplus next year.

Moody’s, which upgraded Cyprus’s sovereign rating by two notches in November to B1, said that it considers the island’s “low-tax environment which supports business attractiveness” and “the strong implementation” of the 2013 bailout terms as credit strengths.

On the other hand, the high debt level of the government, the banking sector and the households and the high level of non-performing loans are considered credit challenges. The finance ministry forecast a 2 per cent growth rate for 2016. The government’s debt to gross domestic product ratio is expected to rise slightly to 108.4 per cent of the economy in 2015 from 2014 before it drops to marginally below the 100 per cent mark next year, the rating company said. The government is expected to post a primary surplus of 2.7 per cent in 2015 which will drop to 2.6 per cent next year.

“Our ‘low’ assessment of Cyprus’ economic strength is based on the small and relatively undiversified nature of the Cypriot economy as well as its relatively weak economic performance since the bail-in of two large banks in 2013,” and the subsequent capital control – which the government lifted ten months ago. “Moreover, the deleveraging process of heavily indebted households and non-financial corporate sector constrains the capacity of the economy.

The still high non-performing loans in the banking sector also weigh on the economic recovery”, Moody’s said The rating company said, on the other hand, that it assesses Cyprus’s institutional strength as high citing Cyprus’s government effectiveness “high ranking” worldwide, “the rule of law and control of corruption with the lack of prudential oversight exercised by the country’s supervisory and regulatory financial bodies compared to the size of the financial sector pre-crisis”. “That said, the score also incorporates the recent developments with regards to the improved management of targets set in the European Union/International Monetary Fund programme by the authorities, and in particular budget execution, has proven prudent more recently,” Moody’s added that it assesses the government’s fiscal strength as low.

Citing the debt level as well as the ratio of debt to revenue which was 267 per cent in 2014, and its “susceptibility to events” as very high as a result of the very low ratings of Cypriot banks it rates and the comparably large size of its banking sector “despite deleveraging”. The rating company said that it would upgrade Cyprus’s rating after the programme exit next month if fiscal discipline continues generating “high levels” of primary fiscal balance, if the risk to the economy from the banking sector is reduced, economic growth accelerates and the upward trend in bad loans is reversed.

A deterioration of the above indicators as well as a re-emergence of elevated financial and debt market stress, which could be triggered in the case of Greece exiting the euro area, would also be credit negative, Moody’s added.