Cyprus may target a wider deficit in 2021 than previously expected, but fiscal performance should still be strong relative to regional peers, Fitch Ratings said.
Commenting on the delay in the approval of the 2021 state budget by parliament, Fitch said this highlighted “pandemic-related spending pressures, although it was primarily caused by political demands for a formal investigation into the citizenship for investment scheme.”
Opposition DIKO made supporting the budget conditional on the government allowing the auditor-general to investigate the controversial ‘golden passports’.
The budget envisages €6.48 bln of revenues and expenditure of €7.16 bln, resulting in a deficit of €680 mln or 3.2% of GDP.
Fitch said due to the delay in approving the budget spending, growth was constrained in the first three weeks of 2021 while a temporary budget, in which expenditure allocations were rolled over from a year earlier, was in place.
Fiscal easing measures, including additional social spending, mean the 2021 fiscal deficit will be wider than the 2% GDP that Fitch forecast when it affirmed the rating last October of BBB- with a stable outlook.
The government estimates that additional fiscal support in 2021 is equal to 1.5% of GDP compared with the initial draft budget prepared in the autumn.
The rise in spending and the widening deficit, Fitch added, reflects the severity of the second wave of Covid-19 infections, which saw the seven-day rolling average of new cases peak above 600 in early January before falling below 130 (daily new cases in the first wave never exceeded 50).
“High public debt is a legacy of the 2012-2013 crisis, but Cyprus`s persistent underlying budget surpluses pre-pandemic, which peaked at 3% of GDP in 2019, and robust GDP growth averaging 4.4% in 2015-2019 increased its capacity to absorb the pandemic shock.”
Fitch said a fiscal deficit of 3.2% this year would be narrower than any other non-`AAA` rated western European sovereign and below the forecast `BBB` category median of 5.3%, whereas the government`s latest estimate for 2020 is about 4.5% of GDP on a cash basis.
“Well below the aggregate eurozone deficit of 8.8% of GDP in the European Commission’s Autumn 2020 economic forecasts.”
Fitch added: “The possibility of continuing economic disruption (notably to the tourism sector, which depends on western European countries hit hard by the second wave of the pandemic) that necessitates further spending or results in lower tax revenues remains a moderate fiscal risk.”
It pointed out that the large banking sector remains a weakness relative to BBB category peers due primarily to weak asset quality, notably very high non-performing exposure ratios that still weigh on capital and profitability.
It also noted that Cyprus has the highest use of loan moratoria in Europe according to the European Banking Authority with about 55% of private-sector loans at end-September.
“This reflects the lack of barriers to granting moratoria and the absence of a state-guaranteed loans scheme, as well as borrower exposure to the sectors most affected by the pandemic.”