Moody’s maintains rating on Cyprus

Moody’s the international rating agency, has kept Cyprus’ rating outlook stable and its credit quality rating in foreign currency at A2 (“medium”), supported by the high per capita income and a manageable debt.

Moody’s pointed out that the large fiscal deficit as a percentage of GDP as well as the ability of the Government to reduce the deficit at acceptable levels would be a major challenge for the Cypriot economy.

Additionally, Moody’s forecasts regarding Cyprus’ fiscal economics and rate of economic growth match the reductions made earlier by the European Commission (EC).

Specifically, for 2006 both Moody’s and the EC anticipate fiscal deficit to reach 2.8% of GDP, whilst the Ministry of Finance of Cyprus forecasts fiscal deficit to reach 1.9% of GDP based on the implementation of the

revised Convergence Plan. Regarding GDP growth, Moody’s anticipates a 4% growth rate for 2006 compared to the MoF’s forecasts of 4.2%. Finally Moody’s anticipates public debt to reach 70.4% of GDP in 2005 and 69.1% in 2006.

Moody’s highlighted Cyprus’ high per capita income, low level of

inflation and unemployment as well as Cyprus’ entry in the EU and the positive impact on the local economy from the adoption of the EURO.

In addition, Moody’s highlights that other challenges for Cyprus include: the gradual decline of the competitiveness of its tourist product, its sensitivity to geopolitical events in the region, the supervision and quality of the loan portfolio of its banking institutions, the bad

management of certain government bodies and the political uncertainty of the Cyprus issue.

Finally Moody’s could revise Cyprus’ rating outlook upwards, should a sustainable improvement in fiscal finances lead to a significant decline of the public debt or downwards, if fiscal finances lead to a further accumulation of public debt and/or Cyprus’ relations with the Turkish community in the north deteriorate thereby increasing the risk of conflict.