Cyprus`s may target a wider deficit in 2021 than we had previously expected, but fiscal performance should still be strong relative to regional and ratings peers, Fitch Ratings has said.
Commenting on the delay in the approval of the 2021 state budget by the Cyprus parliament, Fitch said that this highlighted "pandemic-related spending pressures, although it was primarily caused by political demands for a formal investigation into the country`s citizenship for investment scheme.”
Fitch highlighted that the delay in passing the 2021 budget “after it was rejected in December originally stemmed from the unsuccessful efforts of the opposition DIKO party, which supported previous budgets, to make its backing conditional on the government allowing Cyprus`s auditor-general to investigate the controversial `citizenship for investment` scheme.”
The budget envisages €6.48 billion of revenues and expenditure of €7.16 billion, resulting in a deficit of €680 million or 3.2% of GDP, Fitch said noting that due to the delay in approving the budget spending growth was constrained in the first three weeks of 2021 while a temporary budget, in which expenditure allocations were rolled over from a year earlier, was in place.
However, the agency added that fiscal easing measures, including additional social spending, in the new budget mean that the 2021 fiscal deficit will be wider than the 2% of GDP that Fitch "forecast when we affirmed the rating last October, when the agency affirmed Cyprus’ rating at BBB- with a stable outlook."
According to the agency, the government estimates that the additional fiscal support in 2021 will be equal to 1.5% of GDP compared with the initial draft budget prepared in the autumn.
The rise in spending and the widening deficit, Fitch added, reflects the severity of the second wave of Covid-19 infections, which saw the seven-day rolling average of new cases peak above 600 in early January before falling to 130 by the end of the month (daily new cases in the first wave never exceeded 50).
Furthermore, Fitch noted that “high public debt is a legacy of the 2012-2013 crisis, but Cyprus`s persistent underlying budget surpluses pre-pandemic, which peaked at 3% of GDP in 2019, and robust GDP growth averaging 4.4% in 2015-2019 increased its capacity to absorb the pandemic shock.”
Moreover, the agency pointed out that a fiscal deficit of 3.2% this year, in line with the 2021 budget, would be narrower than any other non-`AAA` rated western European sovereign and below the forecast `BBB` category median of 5.3%, whereas the government`s latest estimate of the 2020 is about 4.5% of GDP on a cash basis, which is “well below the aggregate eurozone deficit of 8.8% of GDP in the European Commission`s Autumn 2020 economic forecasts.”
The agency also noted that “the possibility of continuing economic disruption (notably to the tourism sector, which depends on western European countries hit hard by the second wave of the pandemic) that necessitates further spending or results in lower tax revenues remains a moderate fiscal risk.”
However, the agency pointed out that the large banking sector remains a weakness relative to `BBB` category peers due primarily to weak asset quality, notably very high non-performing exposure ratios that still weigh on capital and profitability. It also noted that Cyprus has the highest use of loan moratoria in Europe according to the European Banking Authority with about 55% of private-sector loans at end-September 2020, pointing out however, that “this reflects the lack of barriers to granting moratoria and the absence of a state-guaranteed loans scheme, as well as borrower exposure to the sectors most affected by the pandemic.”