11/03/2008 13:06
Fitch Ratings drew the government’s attention to the settlement of the pension system in view of the ageing population. In its report, which confirms the existing ratings of the Cyprus economy, Director of Fitch Sovereign team, Chris Pryce said that Cyprus still has to confront one of the largest threats to long-term fiscal stability from an ageing population in Europe as well as the continuing political division of the island.
“The banking sector is also relatively weak in comparison to sovereigns in the 'AA' category although there have been improvements with the Fitch Bank System Indicator (BSI) rising to 'C' (adequate) from 'D' (weak) in 2007”, he added.
“While population ageing and its impact on public expenditure was not the subject of open debate in the recent election, Fitch understands that extensive discussions have taken place among the social partners (primarily trade unions, employers and the government) last year and an element of agreement on proposed reforms exists. The government's Stability Programme presented to the EU in December 2007 assumed that there will be phased increases of 1.3% every five years in social security contributions until 2037 as well as stricter eligibility criteria for pensions", the report said.
Election of new President
As for the election of the new leadership, Fitch said that “the election of a new President, Demetris Christofias, seems likely to break the logjam in negotiations between the Greek Cypriot and Turkish Cypriot communities associated with his hard-line predecessor, Tassos Papadopoulos. Broad-based political support for resumption of talks now seems to exist and negotiations could begin in months under the auspices of the UN. While any final resolution is a distant prospect, re-unification would have sizeable economic benefits although there would also be a short-term fiscal cost”.
Ratings
Fitch Ratings affirmed the Republic of Cyprus's Long-term foreign currency Issuer Default rating (IDR) at 'AA-' (AA minus) with a Stable Outlook and Short-term foreign currency rating at 'F1+'. The agency also affirmed the local currency IDR at 'AA-' (AA minus) with a Stable Outlook and the Country Ceiling at 'AAA'. "Membership of the euro area - which renders transfer and convertibility risk negligible - and fiscal improvements over the last five years have helped Cyprus achieve its current ratings," says Chris Pryce, a Director in Fitch's Sovereign team.
"Economic growth has been robust, averaging around 3.6% over the past decade and inflation has been contained. The balance of payments current account deficit is around 6% but it is quite well-covered by foreign direct investment”, the report said.
“As a member of the EMU, Cyprus's fiscal performance and economic flexibility to respond to shocks are more important as a driver of sovereign ratings than its external finances”, it added.
"In 2007 the Republic recorded its first overall government surplus in several decades and public debt fell to 60% of GDP (2006: 65.2%) by the end of the year. Surpluses, albeit smaller ones, are expected this year and next, and the country's debt ratio is expected to fall sharply to below 50% of GDP by end-2008, thanks largely to the use of financial assets (totalling about 6% of GDP at end-2007) to pay down debt in 2008”, the report concluded.
“The banking sector is also relatively weak in comparison to sovereigns in the 'AA' category although there have been improvements with the Fitch Bank System Indicator (BSI) rising to 'C' (adequate) from 'D' (weak) in 2007”, he added.
“While population ageing and its impact on public expenditure was not the subject of open debate in the recent election, Fitch understands that extensive discussions have taken place among the social partners (primarily trade unions, employers and the government) last year and an element of agreement on proposed reforms exists. The government's Stability Programme presented to the EU in December 2007 assumed that there will be phased increases of 1.3% every five years in social security contributions until 2037 as well as stricter eligibility criteria for pensions", the report said.
Election of new President
As for the election of the new leadership, Fitch said that “the election of a new President, Demetris Christofias, seems likely to break the logjam in negotiations between the Greek Cypriot and Turkish Cypriot communities associated with his hard-line predecessor, Tassos Papadopoulos. Broad-based political support for resumption of talks now seems to exist and negotiations could begin in months under the auspices of the UN. While any final resolution is a distant prospect, re-unification would have sizeable economic benefits although there would also be a short-term fiscal cost”.
Ratings
Fitch Ratings affirmed the Republic of Cyprus's Long-term foreign currency Issuer Default rating (IDR) at 'AA-' (AA minus) with a Stable Outlook and Short-term foreign currency rating at 'F1+'. The agency also affirmed the local currency IDR at 'AA-' (AA minus) with a Stable Outlook and the Country Ceiling at 'AAA'. "Membership of the euro area - which renders transfer and convertibility risk negligible - and fiscal improvements over the last five years have helped Cyprus achieve its current ratings," says Chris Pryce, a Director in Fitch's Sovereign team.
"Economic growth has been robust, averaging around 3.6% over the past decade and inflation has been contained. The balance of payments current account deficit is around 6% but it is quite well-covered by foreign direct investment”, the report said.
“As a member of the EMU, Cyprus's fiscal performance and economic flexibility to respond to shocks are more important as a driver of sovereign ratings than its external finances”, it added.
"In 2007 the Republic recorded its first overall government surplus in several decades and public debt fell to 60% of GDP (2006: 65.2%) by the end of the year. Surpluses, albeit smaller ones, are expected this year and next, and the country's debt ratio is expected to fall sharply to below 50% of GDP by end-2008, thanks largely to the use of financial assets (totalling about 6% of GDP at end-2007) to pay down debt in 2008”, the report concluded.
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