Cyprus aims at maintaining high primary surpluses and use windfall gains to reduce its high public debt on a firm downward path, the Finance Ministry said.
“Over the medium term, the government aims at maintaining high primary surpluses, using windfall revenues to reduce debt or improve the cash position of the state thus locking in the benefits of overperformance, allowing debt-to-GDP to continue its downward path over 2020-22 at a satisfactory pace,” the Ministry said in its Stability Programme 2019-2022.
It said the budget surplus is estimated to reach 3% of GDP this year and is projected to decline marginally to 2.6% in 2020 and 2.4% and 2.2% in 2021 and 2022 respectively.
Primary surplus, (the balance excluding debt servicing expenditure) from an estimated 5.3% in 2019 is projected to decline to 4.8% in 2020 and stabilise at 4.4% and 4.1% of GDP in 2021 and 2022.
Cyprus’ public debt which spiked at €21.25 bln or 102.5% of GDP due to the bonds issued to facilitate the sale of the state-owned Cyprus Cooperative Bank to Hellenic Bank, amounting to €3.2 bln is estimated to decline to €20.7 bln or 95.7% of GDP in end-2019.
Over the programming period of 2020-2022, the debt-to-GDP ratio is projected to continue its downward trend declining to about 89.1%, 83% and 77.5% by year end 2020, 2021and 2022, respectively.
On the banking sector, the Finance Ministry said the reduction of the non-performing exposures (NPEs) in the banking system remains a key priority, adding that NPEs could decline to 25% of total loans by the end of 2019 from 32% or €11.25 billion in the end of last year.
The new targets come after a sizable reduction of over €8 bln of NPEs in 2018 due to the sale of the Co-op and the transfer of its NPEs, amounting to €5.7 bln in a state owned asset management company and the sale of NPEs amounting to €2.7 bln by Bank of Cyprus to Apollo Fund.
For 2019, the Ministry said NPEs for house purchasing and SME non-performing loans with primary residences pledged as collateral amounting to €3.4 bln, are eligible to participate in the Estia scheme which includes state subsidy for one third of the repayment scheme, while the banks will participate by impairing the loans to the value of the collateral.
“Based on the above, it is feasible to achieve a reduction of NPEs stock in the banking sector down to 25% of total loans by end of 2019,” the Ministry said.
The banking sector’s size (in terms of assets) declined below 300% of GDP, to 286% of GDP in the third quarter of 2018 from 352% of GDP in 2017 and 631% of GDP in 2012.
“The large decrease in the size of the banking sector in 2018 was mainly due to the legal transfer of €9 bln of Co-op assets to the remaining residual entity called KEDIPES, which is state owned asset management company (thus outside the banking system) and the sale of a large loan portfolio of €2.8 bln (of which 2.7 bln are NPEs) by the Bank of Cyprus to Apollo fund.”
