On 6 July 2020, the Cyprus government announced that it was seeking to raise up to EURO 750m from the international markets. The move is intended to take advantage of current low borrowing costs. It follows a successful double bond issue in April 2020 which raised EURO 1.25bn and was massively oversubscribed.
The latest issue is expected to be similarly successful and, whilst it will raise the level of public debt to above 120% of GDP for the first time (exceeding the previous high of 109.2% in 2014), the move is unlikely to set international alarm bells ringing. Prior to the advent of the Covid 19 pandemic Cyprus could boast a healthy fiscal surplus and a record of gradually reducing public debt following the country's banking crisis. The two latest funding rounds are viewed as a necessary accompaniment to the sizeable economic support packages which have been put in place to partially offset the negative impact of Covid 19 on the Cyprus economy. The general view of international credit agencies appears to be that Cyprus has performed well in terms of containing the virus and, also, in terms of the measures it has taken to try to safeguard the economy. In the last ratings announced, near the start of the pandemic, the uncertainty surrounding its potential impact on Cyprus resulted in Moody's, Fitch and S&P all maintaining the pre-existing rating level, but, revising a previously 'positive' outlook for the country down to a 'stable' one. On 1 July 2020, Moody's became the first of these agencies to reinstate the outlook for Cyprus to 'positive'.
Significantly, Moody's expects Cyprus public debt levels to spike in 2020 because of Covid 19 but views the situation as transitory rather than entrenched. The agency is currently confident that the fiscal and debt position of the country will begin to improve from 2021; although large fiscal surpluses are not anticipated in the short term. In the medium term, a steady decline in the public debt, allied with a reduction in the percentage of non-performing loans could result in an upgrade to the current Ba2 positive rating. Whilst this may seem unduly optimistic in current circumstances, it should be noted that in a recent interview the General Director of the Ministry of Finance, George Pantelis, stated that, despite the current difficult circumstances, the reduction of the percentage of non-performing loans remains and important goal for the government. Furthermore, whilst government forecasts suggest that the impact of Covid 19 in 2020 will be a 7% reduction in GDP, 2021 is predicted to show domestic demand driven GDP growth of the order of 6%.
If the government can achieve this triple feat of returning public debt to a downward trend, reducing the non-performing loan percentage and returning the country to GDP growth it will be a ringing endorsement of one of the largest per capita Covid 19 support programs in Europe.
Originally published 09 July, 2020
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