Bad news has been delivered to the government of Cyprus by the Moody’s international credit rating agency, which has decided that the “A-2/P-1” or “negative” rating that it assigned the island’s economy last May will remain unchanged.
When the negative rating was made last May, Moody's had explained that it was a result of lack of progress in bringing the fiscal debt under control, the rapid extension of bank credit, and rising external debt. By virtue of the fact that the rating has remained the same, the agency has not perceived any substantial change in economic conditions.
Still, in its latest report, Moody’s did acknowledge a modest increase in Cyprus’ per-capita income, its manageable public debt and the fact that it is likely to join the European Union in the next accession round
.
Other constraints on Cyprus’ credit rating include a dependence on tourism for foreign exchange revenue, declining competitiveness, and a significant deterioration in the budget and external finances, Moody's stated in its report.
Moody’s also noted the Cypriot government’s lack of success in implementing an economic reform plan aimed at reducing the national budget deficit. While the government did manage to negotiate a 2 percent increase in the value-added tax rate last May, delays in legislating tax changes are likely to prove this year's fiscal targets unattainable, the ratings agency stated.
But Moody’s sees the process toward EU membership as being a positive catalyst for change. The gradual deregulation of the financial system, including the removal of inward and outward capital controls will increase the market orientation of the Cypriot banking system, it stated.
Like Moody's, the Fitch ratings agency also has expressed concern about the potential instability of the Cypriot economy. – (Albawaba-MEBG)
© 2001 Mena Report (www.menareport.com)
