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FITCH RATINGS ASSIGNS 'A+' TO THE REPBLIC OF CYPRUS
2002-02-05 07:38:05

Business Wire 02/01/02, 1:16p
(Copyright ? 2002, Business Wire)
LONDON--(BUSINESS WIRE)--Feb. 1, 2002--Fitch Ratings today announced that it has assigned an 'A+' long-term foreign currency rating to the Republic of Cyprus and a short-term foreign currency rating of 'F1'. Fitch also assigned a long-term local currency rating of 'AA'. The Rating Outlook is Stable.

Cyprus benefits from a dynamic market economy that supports full employment and steady growth in per capita income to 86% of the EU average, exceeding that of Greece (rated 'A' by Fitch), Portugal ('AA') and Spain ('AA+') and double the average of all the EU Accession countries of Central and Eastern Europe. Moreover, relative to other EU Accession countries, Cyprus benefits from long-standing institutional and legal infrastructure necessary for the effective enforcement of private property rights, essential to the functioning of a market economy, as well as a track record of low inflation and exchange rate stability.

A crucial development in recent years was the decision by the European Union that resolution of the so-called 'Cyprus problem' - the continuing occupation of the north by the self-declared "Turkish Republic of Northern Cyprus"(the "TRNC" is not recognised by the international community) - is not a precondition for Cyprus joining the European Union in the next wave of enlargement. Consequently Fitch anticipates that Cyprus will be a full member of the EU in 2004/2005. Resolution of the 'Cyprus problem' would be a positive credit development, removing a source of potential risk and enhancing medium-term economic prospects, though it would impose short-term fiscal and external costs that would require careful management.

Importantly, the EU Accession process has motivated the authorities to speed the pace of financial liberalisation, strengthen the macroeconomic policy framework and pursue a medium-term programme of fiscal consolidation. The government's budget deficit has been cut from 5 1/2% of GDP in 1998 to under 3% of GDP last year. After rising in the latter half of the last decade, public debt stabilised at 60% of GDP. Proposals currently before parliament will shift the burden of taxation from direct to indirect taxes, reducing the cyclical sensitivity of government revenues and will be supportive of further fiscal consolidation.

As a small open economy dominated by tourism, estimated to account for around 20% of GDP, Cyprus is relatively vulnerable to external shocks. Moreover, though the official sector is a net external creditor with foreign currency debt a moderate 20% of GDP, the banking sector net external position has gradually been deteriorating and combined with substantial non-resident foreign currency deposits - US$6.1 billion at the end of last year - is a potential risk. Nonetheless, non-resident deposits have proved stable through various external and domestic shocks. While Russia and Eastern Europe are the source of around 40% of non-resident deposits, the growth in non-resident deposits in recent years has been driven by the successful development of the offshore business sector. Neither the business nor banking offshore sectors is judged to pose a material risk to macroeconomic stability given limited links to the on-shore economy. Cyprus's off-shore banking centre has not been identified by the OECD as 'un-cooperative' and requiring special attention, while in a recent report the IMF concluded that supervision was generally effective and thorough. A strengthening of the domestic banking sector would support an improvement in Cyprus's international creditworthiness over the medium-term.

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