The A2 rating and stable outlook for Cyprus reflect the country's moderately high per capita income and manageable public debt burden, reports Moody's Investors Service in its annual sovereign credit report on the island.
Cyprus is expected to join the European Union (EU) on May 1, 2004. For this divided island, this is an historical achievement bearing major political and economic significance. Cyprus is set to reap substantial efficiency gains from recent EU accession related changes, which saw the swift introduction of a significant number of measures promoting liberalization and deregulation of the domestic economy.
A new tax reform was introduced in 2002 lowering the marginal rates for individuals and companies and preserving an attractive tax regime for international companies.
“Moody’s believes that the new tax system, coupled with Cyprus’ wide network of double tax treaties, will improve the island’s attractiveness as an international business center in the European Union,” said Moody’s AVP and author of the annual credit report, Bernard Musyck.
The island’s workforce boasts a relatively high and broad level of education, mainly at the graduate level. This constitutes a significant asset in adapting to the changing economic environment and seizing new opportunities in the new economy.
Constraints on the rating include high dependence on tourism for foreign exchange revenue, sensitivity to developments in the neighboring region, labor market rigidities in specific sectors, certain weak components of the financial system, and a need for further restructuring in the public sector, says Moody’s.
Cyprus has enjoyed a full employment situation for quite some time, but the local labor market still lacks the flexibility to address labor shortages and changing work practices in certain sectors. In specific cases, labor market rigidities are compelled by the strong influence of the unions and their periodic resort to interfering actions which often impedes necessary reforms.
“While the number of workdays lost and work stoppages remained low in recent years, these disputes often result in the demands of the unions being met, with insufficient consideration for subsequent losses in competitiveness and a lack of safeguarding of the interests of the public at large” notes Musyck.
Further, the rating agency notes its concern about the growing size of the public sector payroll, where average earnings in real terms during the last two decades recorded the second-highest rise after financial and business services. “A thorough restructuring of the public sector will become unavoidable once a reassessment is carried out of the current and future needs for modern public services and the necessity to allocate resources more efficiently,” says Musyck.
Despite intense negotiations in recent months, a solution of the “Cyprus problem” could not be reached. The possible outcome of the peace process is difficult to predict at this stage, but some developments could be expected towards the end of 2004, when Turkey will be seeking a date to start accession negotiations with the EU.
While there is no doubt that a settlement would entail considerable costs in the short and medium term, “what is immensely more relevant are the dynamic long-term benefits of unification that will allow Cyprus, a new EU country, to play its regional role to the full,” Musyck concludes.
The issuance of this annual credit report is an annual update to the markets and should not be confused with a formal rating action intended to alter the credit rating of the issuer. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
