DBRS: Cyprus’ growth to remain strong, fiscal outlook exposed to risks

While Cyprus’ economic growth is expected to remain strong, the economic and the fiscal outlooks are exposed to significant downside risks, DBRS Morningstar said in a Commentary on the country’s new Stability Programme.

In the Commentary, titled: “Cyprus: New Stability Programme Signals Fiscal Policy Continuity”, the rating agency noted that the new government has presented its first official medium-term budgetary targets since taking office.

“Similar to the projections of the previous government's Draft Budget 2023 released in October 2022, the Stability Programme 2023-2026, published on 3 May 2023, forecasts recurring budgetary surpluses and, as a result, a marked reduction in the high public debt burden over the next few years”, it added.

It also noted that, the Stability Programme targets an average general government budget surplus of 2.3% during 2023-2026 and that, favourable fiscal projections “are based on the assumption that public tax revenues will continue to be bolstered largely by strong economic growth dynamics”.

“While we expect economic growth to remain strong, the economic and the fiscal outlooks are exposed to significant downside risks”, it added.

Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar, noted that, Cyprus is one of the very few Euro Area countries which currently targets recurring fiscal surpluses over the medium-term. Noting that, these favourable fiscal projections are not based on expenditure cuts but rather on the expectation that strong economic tailwinds will continue to bolster public tax revenues, he said that a continuation of favourable economic growth dynamics is essential for achieving these fiscal targets over the next years.

The rating agency said that total public revenues are projected to increase by an annual average rate of 5.7% during the years 2023-2026 which, in turn, would accommodate rising public expenditure (+5.6%). In terms of economic growth, it adds, the Stability Programme expects real GDP growth to average 3.0% during 2023-2026. On the supply side, important service sector activities such as ICT and tourism are likely to remain the main growth drivers, it said. “We expect the number of tourist arrivals to continue to increase not least as a result of the opening of new large-scale tourist facilities over the next months including the Limassol casino resort. Furthermore, domestic investment activity is likely to be supported by the inflow of NextGenerationEU funds over the next years”, it added.

It said however, that while its baseline scenario expects growth dynamics to remain favourable, “we note that the economic and the fiscal outlooks are exposed to important downside risks such as an escalation of the conflict in Ukraine or higher global financial fragility, which would likely weaken external and internal demand”. A stronger-than-currently expected weakening of economic activity, in turn, it adds, would likely weigh on government tax revenues. Furthermore, a potential new economic shock might require a step-up in government support measures as has been the case during the COVID-19 pandemic, the rating agency said.