Moody’s warns on Cyprus fiscal discipline

Moody’s Investors Service warned the Cyprus government regarding its fiscal policy ahead of the 2008 presidential elections, as any deviations from the stated budget would result in a lower rating of its credit outlook. However, Moody’s recent positive rating

action, that followed EU’s decision to allow Cyprus to adopt the euro on 1 January 2008, is viewed as a credit positive because it will eliminate the risk of a currency crisis and thereby isolate the economy from external financial shocks. Moody’s refers to the strengthening of economic fundamentals of Cyprus, pointing to its high per capita GDP, the lower inflation and unemployment rates, as well as the resilience of the Cypriot economy which would be further benefited from euro adoption and the continuous fiscal discipline.

Moody’s analysts anticipate that fiscal deficit for 2007 and 2008 would reach 1.4% of GDP in both years, with public debt estimated at 61.5% and 54.8% of GDP respectively. As far as GDP growth is concerned, the analysts forecast a 3.8% and 3.9% growth in 2007 and 2008 respectively, whilst inflation is forecasted at 1.7% in 2007 and 2.0% in 2008.

Finally, Moody’s report cites the challenges faced by the Cypriot economy which include the possibility of a worsening public debt, issues on local competitiveness, the uncertainty of Cyprus’ reunification, and geopolitical unrest in the area.