Moody’s says economy still “susceptible to every risk”


By Stelios Orphanides

Moody’s Investors Services said that despite the Cypriot economy’s robust growth the strong fiscal performance faces challenges related to its small size, relative lack of diversification and high levels of indebtedness.

“Cyprus’ growth momentum, coupled with strong fiscal performance, helped to reduce the country’s debt-to-GDP (gross domestic product) ratio in 2016 for the first time since 2008,” Moody’s senior vice president Sarah Carlson, who authored an annual credit analysis report on the island’s economy, was cited as saying on Monday.

“We expect a decline in the debt-to-GDP ratio to close to 100 per cent by the end of this year. The country has regained capital market access and has a cash buffer, which will help to cover financing needs next year”.

The report, titled Government of Cyprus – Ba3 Positive, Annual Credit Analysis, said Cyprus’ economic output, expected to increase 3.5 per cent this year, is forecast to expand 3.2 per cent in 2018, for the fourth consecutive year after exiting a prolonged recession in 2015.

The report does not include any rating action. Moody’s last upgraded Cyprus’ sovereign credit rating two years ago by two notches to B1, which is four grades into the speculative area or junk.

“Although Moody’s expects household private debt servicing to result in a deceleration in the growth of private consumption, it is still likely to be the main driver of the ongoing expansion, supported by favourable developments in the labour market and the important tourism sector,” the rating company said. “After the strong fiscal consolidation efforts realised in recent years, the government’s 2017-19 medium term fiscal plan assumes a broadly neutral fiscal stance, with a slight deterioration in the general government budget balance pencilled in for 2018”.

The rating company expects the government to generate a fiscal deficit of 0.4 per cent of economic output this year, compared to a fiscal surplus of twice as much the government has forecast by, it said.

A 2.1 per cent primary surplus will help reduce public debt which fell to below the 100 per cent level three weeks ago with the partial early repayment of debt to the Central Bank of Cyprus.

“Cypriot government debt remains affordable, reflecting the very large share of official sector creditors in the total debt stock,” Moody’s said. “Interest charges took up only 6.6 per cent of general government revenue in 2016, down from a peak of 9.2 per cent in 2013, and this is likely to stay just below 7 per cent over the next two years. In Moody’s central scenario, public debt will decline to around 92 per cent of GDP by 2019”.

“However, Cyprus’ debt metrics still remain vulnerable to a negative growth, fiscal or a combined shock scenario,” with the island’s economy being “susceptible to every risk” given the vulnerabilities of the banking sector which still struggles with a non-performing loans ratio of around 45 per cent, Moody’s said.

“The positive outlook on Cyprus’ sovereign rating reflects Moody’s view that improvements in economic resilience and fiscal strength are likely to be sustained,” the credit rating company added.


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Stelios Orphanides is a journalist at To contact Stelios Orphanides: [email protected]

  • dave

    The economy is run as a Soviet era worker/union dominated economy

    It will go the same way

  • alexander reutersward

    no problemas, Egypt will buy loads of gas from Cyprus in 2018 as lakkotrypis stated a few years ago

  • Kevin Ingham

    All economies are subject to risk of a downturn- what makes Cyprus more vulnerable are the astonishing levels of debt, both private and public and the unsustainable nature of the current growth.

    Very little is actually being done to alleviate the problems associated with the debt, because that would automatically cause a contraction of the economy as banks wind up businesses that are trading whilst insolvent,and increasing taxes to pay back governmnet borrowing would suck more liquidity out of the economy and further hit consumer spending.

    Healthy banks and solvent governments can help alleviate problems created by downturn as they occur- the current Cypriot banking system and government simply cannot

    Cyprus needs to sort itself out and create a more business friendly environment, but there is very little sign of that happening- that would help the economy cope when the still to be undertaken financial correction process takes place

    We are simply seeing the same sort of economic “model based on foreign investment of the more dubious sort based on tax and citizenship “perks” that brought about the last crash

    • Neroli

      And soon to be repeated!

  • dave

    ‘further hit consumer spending.’

    Is this a problem, seeing as most consumer spending is on imports?

    • Kevin Ingham

      Well yes and no- balance of payments invariably “works” itself out

      Capital outflows on imports will be offset by capital inflows on things such as tourism, banking and property purchases. Any discrepancies will be covered by simple injections of “money” by the financial authority responsible for the money supply (in this case the ECB)

      That does not stop the country being sold off to foreign investors of course, or Cypriots becoming second class citizens in their own country (if you buy a Cypriot passport neither you or your sons have an obligation to do your national service or even pay your income tax in Cyprus )

      It’s a slightly different mechanism when you control your own money supply

  • Vegchef

    I wonder if this report was written before the President went in election mode and started spending taxpayers money

  • Alex

    Way to much debt, to much of which is at risk.
    Not enough drive for exports.
    Too reliant in imports.
    Underperforming economy.
    Government sector far to big and unnecessary.
    State assets should be privatised.
    State employees underutilised.
    Personal and Business Taxes should be reduced to atract investors.
    But – what do I know……

    • Bernard Smart

      I can see why u are not employed by moody’s to write flowery reports.
      IMHO the next crash is going to happen sooner or latter. Perhaps when they have to start repaying the loans but then they are experts in NPL’s

      • Alex

        Don’t be so humble, nothing wrong with flowery…..