S&P ups Cyprus outlook to positive

A/A-1 ratings affirmed

 

LONDON (Standard & Poor’s) March 29, 2007. Standard & Poor’s Ratings Services said today it revised its outlook on the Republic of Cyprus to positive from stable based on the rapid improvement in its fiscal position since 2005. At the same time, the ‘A’ long-term and the ‘A-1’ short-term foreign and local currency sovereign credit ratings on Cyprus were affirmed.

“The ratings on Cyprus are supported by its prosperous and resilient economy, short but impressive track record of fiscal consolidation, and the prospect of EMU membership,” said Standard & Poor’s credit analyst Eileen Zhang. “The ratings are, however, constrained by the sovereign’s high, but declining public debt burden and poor external liquidity.”

The Cypriot government’s goal of early EMU membership has prompted rapid fiscal consolidation since 2005, with the general government deficit falling below 2% of GDP in 2006 and 2007, compared with 4%-6% of GDP in 2001-2003. With unification plans shelved since the referendum in April 2004, the government has been able to devote its energies and focus to macroeconomic policies and to strengthening Cyprus‘ position within the EU. Gross general government debt is expected to decline to less than 60% of GDP in 2008 from a peak of 70% in 2004, aided both by sizable primary surpluses and by the use of sinking fund assets.

Standard & Poor’s expects Cyprus to join the Eurozone in 2008 as planned. Adoption of the euro will ultimately shield Cyprus from exchange rate risks.

“We expect that the Cypriot government’s commitment to budgetary consolidation will continue to produce a low fiscal deficit and will further reduce its debt burden, even after the adoption of the euro,” said Ms. Zhang. Sustained improvements in the budgetary process (including a medium-term fiscal framework and elimination of expansionary supplementary budgets), more efficient revenue collection, and a lasting decline in transfer payments and defense expenditures could improve the creditworthiness of the republic in the short to medium term. Conversely, any slippage back to the high deficits of the recent past would weaken the government’s credit standing.