Rating agencies turn spotlight on elections

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Credit rating agencies are keeping an eye on Cyprus’ presidential elections in February to conclude how the island’s new administration will be running public finances, say economists.

Rating agencies will launch a new round of evaluation for Cyprus in early March, just weeks after the elections of the new President.

President Nicos Anastasiades’ second term is ending after ten years in power; he is not seeking re-election.

The mantle will be handed to one of the three leaders in the race, ruling DISY leader Averof Neophytou, former DISY member and foreign minister Nikos Christodoulides and opposition AKEL-backed Andreas Mavroyiannis.

In comments to the news site Stockwatch, economist Tassos Yiasemides said rating agencies would be going over five points linked to the government’s fiscal policies and responses to crises.

“First thing they will be looking at is how the new government will be handling the course of the economy, inflation rates and the cost of borrowing,” said Yiasemides.

Secondly, according to the economist, rating agencies will look at how the Cypriot economy is affected by the recession in the EU.

Third, the new administration’s policies on reforms, especially regarding the recovery fund and the general health system.

“They will also analyse how Cyprus will reduce its public debt, while inevitably they will be evaluating the new President’s program, and the new finance minister’s intentions.”

Stability

Economist Stelios Platis said the political environment and stability would be at the top of the agencies’ checklist.

“Stability is important.

“They will examine whether the new president has the necessary support from parliament to push reforms and steer the economy through the volatile conditions internationally.

“The rating agencies, when analysing a state’s creditworthiness, usually evaluate the political environment, the economic strength in general and the prospects, as well as the solvency of public finances.

“In our case, I assess that we will be judged positively on all these parameters in relation to the rest of the EU”.

Economist, Marios Soupashis, argues that the assessment of the rating agencies will focus on four main factors.

“The first concerns the public debt, which, at the end of 2022, it’s estimated to exceed 105% of GDP.

“Although there has been a steep drop since 2020 when the index was at 115%, it is important that the Republic of Cyprus maintains the existing levels and/or reduces them,” said Soupashis.

He added that the affordability of borrowing (lending rate) in the Cypriot economy (in relation to its income) is expected at 4% at the end of the year.

Soupashis said the second factor concerns the fiscal deficit, which recorded “tremendous improvement” during the last two years (-5.8% GDP in 2020 and -1.7% in 2021), while a surplus is expected for the past year.

“After the elections, fiscal discipline will be put under the microscope of the rating agencies, as it proved to be the island’s Achilles’ Heel the last time its economy was downgraded to junk”.

Economic growth during the Ukraine war will also be on the list. However, he argued that the Republic would keep its growth momentum even after the elections.

“Agencies will also be looking at the island’s banking system, focusing on NPLs, which now amount to €3 bln.

“Developments such as potential takeovers and deals to package and sell NPLs to funds will also be taken into consideration,” said Soupashis.