A delegation from Fitch, the international ratings organization, visited Cyprus in October 2006 in order to review the status of the Cyprus economy. In a press release issued on January 11 2007, Fitch affirmed the positive outlook of the Cyprus economy. Cyprus's foreign currency issuer default rating (IDR) has been affirmed at A+ with a positive outlook and the short-term foreign currency rating at F1.
Fitch noted that Cyprus is a modern, predominantly services-based economy with much more in common with other western European states bordering the Mediterranean than with the eight former communist states that joined the EU in 2004. It has a large tourist industry, a growing business services sector and a long-established capitalist economy. Its income per head compares well with its rated peers.
"Above all, it now looks highly likely to qualify this year for full membership of European Monetary Union in 2008, an event that will enhance Cyprus's credit profile," according to Chris Pryce, a director in Fitch's sovereign department.
Fitch noted an improvement in fiscal performance in the last three years, thanks to a determined fiscal consolidation programme entailing expenditure restraint, an increase in VAT coverage and a major effort to improve revenue collection. As a result the fiscal deficit fell below 3% in 2005 and is estimated to be below 2% of GDP in 2006.
Public debt fell as a proportion of GDP to just below 65% by end-2006 (official estimate) and on a net basis, taking into account liquid assets in the government's sinking funds which are earmarked for the purpose of repaying government debt and which will become fully available for debt repayment by 2008, debt was already 3% below the Maastricht limit of 60% in 2006.
Cyprus's inflation rate has been reduced in recent months and now satisfies the Maastricht criterion with a reasonable margin of safety. Cyprus has also made satisfactory progress as a member of ERMII, with the Cyprus pound trading on the strong side within the (voluntary) narrow band.
Fitch noted that full membership of EMU will mitigate sovereign credit risks associated with Cyprus's relatively weak external finances, including high net external debt (at 41% of total export earnings in 2006) and a sizeable current account deficit.
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