Moody’s warns on Cyprus economic prospects

Moody’s Investors Service warned the Cyprus government regarding its fiscal policies, as any deviations from budgets would result in a lower rating of its credit outlook. Despite the recent improvement in Cyprus’ fiscal economics the rating agency pointed its concerns on the sustainability of revenues recorded in the previous years as well as the increasing health and pension expenditure. The Government has announced a new package for pensioners and Moody’s estimates its additional cost at EUR 35-40 mln or 0.25% of GDP.

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.

Finally, Moody’s analysts anticipate that fiscal surplus for 2008 would reach 0.1% of GDP (vs. +1.5% in 2007), with public debt estimated at 53.3% of GDP (vs. 60% in 2007). As far as GDP is concerned, the analysts forecast a 3.9% growth in 2008 (vs. 4.4% in 2007), whilst inflation is forecasted at 3.2% in 2008 (vs. 3.9% in 2007).

According to the Stability Programme, the fiscal surplus, public debt, GDP and inflation rate are estimated at +0.5% of GDP, 48.5% of GDP, 4.1% (though recent announcements made by the new Finance Minister call for a lower than 4% GDP growth rate in 2008) and 2.5% respectively.