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CYPRUS: Public debt remains stable in the first half of 2014

07 August, 2014

The General Government Debt remained broadly stable at €18.56 bn at the end July 2014 (preliminary data) vis-a-vis the end of December 2013 when it was €18.4 bn., according to figures released today by the Public Debt Management Office of the Ministry of Finance.

Average short term debt yields have continued to drop in June and July with short term rates falling at 4.22% in the end of July from 4.48% at the end of Q1 2014.

Long term bond yields exhibited relative stability during the period of June-July remaining around the 5% mark despite the number of negative news regarding the external environment faced by the Republic and the continuing crises in Ukraine and the Middle East.

The 5th Programme tranche was disbursed in July 2014 amounting to a total of €683 mln. Next Programme disbursements are scheduled in September-October 2014 from the ESM (€350 mn) and the IMF (74.3 mn SDR; est. around €85 mn depending on exchange rate)

According to the report on fiscal developments, developments in public finances continue to exceed expectations.

General government budget balance (GGBB) was in deficit during the first half of 2014, of the order of €22 mln (-0.1% of GDP) compared to a forecast deficit of -€145 mln (-0.9% of GDP). General government primary balance (GGPB) was in surplus during the first half of 2014, of the order of €171 mln (1.1% of GDP) compared to target surplus of €46 mln (0.3% of GDP).

Total revenue reached €3,180 mln during the first half of 2014, in line with the forecast. Total expenditure reached €3,202 mln during the first half of 2014, exhibiting a decline of €124 mln vis-à-vis the forecast.

In accordance with the macroeconomic scenario agreed during the 5th review, the budget balance is estimated to exhibit an improvement with the deficit falling to 4.7% of GDP in 2014 compared to a deficit of 5.4% the year before.

On public debt and financing, the report notes that the Republic of Cyprus issued a five year EMTN bond on the 25th of June through a syndicated issue. The issue was for an amount of €750 mln and a coupon of 4,75% (4,85% yield).

On the 1st of July the Republic proceeded to a partial early repayment of the bank recapitalization bond held by the Bank of Cyprus (yield 5,15%) for an amount of €950 mln. The transaction had the following effects on the Bank: a. Reliance on ECB funding, including ELA, was reduced by €950 mln b. Accounting profits of €95 mln were recorded on the transaction c. Common equity tier 1 Capital was increased by €95 mln

DBRS upgraded the Republic of Cyprus from CCC to B(low) on the 27th of June 2014.

Regarding the macroeconomic Environment, in the 1st quarter of 2014, GDP (in seasonally adjusted terms) contracted by -4.1% compared with -4.9% in the 4th quarter of 2013 on an annual basis.

The contraction was mainly due to the subdued performance of the secondary sector (construction, manufacturing) and the financial sector. From the expenditure side, the contraction was more pronounced in investments of construction, while net exports made a positive contribution.

The business operating environment remains constrained, given that lending to non-financial corporations is subdued and interest rates are still relative to economic conditions high.
Public Debt Management Office expresses the view that that growth in 2014 will remain negative, around 3½-4%, and “we assume a rebound in 2015 with a gradual restoration of lending at affordable rates”.

Exports of goods decreased by 7.1% in January-May 2014 compared to the corresponding period in 2013. In January-June 2014 tourist arrivals increased by 6% compared to the corresponding period in 2013. An increase of 1.4% was recorded in arrivals from the United Kingdom, a 3.7% decrease in arrivals from Greece and a 17.6% increase in arrivals from Russia.

Inflation as measured by the HICP, stood at 0% in June 2014 compared to -0.1% in May 2014 and for 2014 so far it stands at -0.7%. Labour Force Survey (LFS) unemployment, in monthly seasonally adjusted figures, decreased from 15.9% in May 2013 to 15.3% in May 2014.

The most affected segment of the population is youth. Particularly worrying is also the rapid increase in long-term unemployed.

Compensation per employee in the 1st quarter of 2014 declined by around 4.5% compared to the 1st quarter of 2013, contributing to a decline of nominal unit labour costs and improving cost competitiveness further. The observed wage adjustment is expected to help containing the upward pressure on unemployment, the report concludes.