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Cyprus's fiscal strengths are strong despite the biggest budget deficit, Fitch points out

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Cyprus's fiscal strengths are strong despite the biggest budget deficit, Fitch points out

Cyprus 'fiscal performance remains strong relative to other countries with the same “BBB” rating, Fitch Ratings points out, despite the fact that Cyprus' budget for 2021 predicts a larger deficit than previously expected by the house .

At the same time, the American house emphasizes that the large banking sector remains “a weakness” for Cyprus, in relation to the other countries with the same rating “BBB”, and this is mainly due to the poor quality of the assets of the Cypriot banks, in particular the very high rates of non-performing loans that continue to affect their capital and profitability.

Citing a report by the European Banking Authority, Fitch says Cyprus has the highest rate of deferred loans in Europe (around 55% of private sector loans at the end of September 2020), but this reflects a lack of barriers to lending, he said. moratorium and the absence of a state loan guarantee scheme, as borrowers are exposed to the areas most affected by the pandemic.

Budget 2021
Regarding the 2021 budget, the American house states that the delay in the adoption of the budget underlines the pressures for the expenses related to the pandemic, although the delay was caused mainly due to political demands for a formal investigation of the naturalizations given in the program. Investment.

According to Fitch, the significant fiscal consolidation that Cyprus has achieved since the onset of the economic crisis in 2012-2013 is a “significant strength” for Cyprus' current rating, “BBB -” / Fixed.

However, the house says that the fiscal easing measures, including additional social spending, included in the new budget show that the 2021 budget deficit will be greater than 2% of GDP, as it reports, from the deficit it expected when it confirmed the assessment of Cyprus last October.

This partly reflects the severity, he notes, of the second wave of Covid-19 cases, which showed that the seven-day average of new cases peaked at over 600 in early January, before dropping to 130 at the end of the month (daily news cases in the first wave never exceeded 50).

He adds that the Cypriot Government estimates that the additional budget support in 2021 will be equal to 1.5% of GDP compared to the initial draft budget prepared in the autumn.


Fitch, noting that high public debt is a legacy of the 2012-2013 financial crisis, stresses that Cyprus has increased its capacity to absorb the shock caused by the pandemic due to the surpluses recorded before the pandemic, which peaked to 3% of GDP in 2019 but also of strong growth with an average of 4.4% presented in the period 2015-2019.

He points out that a budget deficit of 3.2% for this year, according to the 2021 budget, will be smaller than any other Western European country that does not maintain the “AAA” rating and below the average of 5.3% of countries with “BBB” rating.

He also says that the Cypriot government's latest estimate for the 2020 budget deficit is about 4.5% of GDP, well below the Eurozone deficit of 8.8% of GDP, according to the European Commission's economic forecasts last autumn. .

In addition, the US House notes that the delay in approving the 2021 budget after its rejection in December, originally came from the (unsuccessful) efforts of the opposition party DIKO, which supported previous budgets, to make the vote dependent on by the government to the Auditor General of Cyprus to investigate “controversial” nationalities granted under the investment program.

However, Fitch says that as the budget debate continued, political pressure for higher spending increased, especially calls for more social spending in response to the pandemic recession (2020 shrinkage estimated at 5.5% – 6.0%, although GDP remains 20% higher in the third quarter of 2020, from 2015).

Finally, Fitch emphasizes that the fiscal risk that will require further expenditure or lead to lower tax revenues than the possibility of continuing the economic turmoil (especially in the tourism sector, which is highly dependent on Western European countries hard from the second wave of the pandemic).

Source: politis.com.cy

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