ECONOMY

Cyprus pensions warning

Without concerted policy and fiscal reforms, the aging Cypriot population will lead to intense pressure on the public finances and the ratings on the country, Standard & Poor’s Ratings Services said in a report published yesterday. The report, titled «Global Graying Country Report: Republic of Cyprus,» provides a country-specific analysis on Cyprus (A/Stable/A-1), complementing the overall report covering 32 countries. «In the absence of further reforms, total age-related public expenditures in Cyprus will rise to 26.2 percent of GDP in 2050, up from 10.9 percent in 2005,» said Standard & Poor’s credit analyst Eileen Zhang. «Under this scenario, general government deficits and net debt would rise sharply from the early 2030s to reach 31 percent and 327 percent of GDP, respectively, by 2050.» A fiscal deterioration of that magnitude would not be compatible with the current ‘A’ long-term sovereign rating on Cyprus. After 2010, it would fall into the ‘BBB’ category. In 2020, Cyprus’s fiscal indicators would have weakened to an extent that they would be more typical of performances currently associated with speculative-grade sovereigns. This scenario is not a prediction by Standard & Poor’s. It is a simulation that highlights the importance of age-related spending trends as a factor in the evolution of sovereign creditworthiness. In reality, it is highly unlikely that governments will allow debt and deficit burdens to spiral out of control. Once governments are confronted with unsustainably rising debt burdens they do react, however reluctantly, by tightening the fiscal stance and/or reforming expenditure programs. The scenario analysis gives some valuable insights about the power of policy choices. If Cyprus were to embark on a radical structural reform preventing age-related spending from rising, fiscal indicators would hold up much better. Following such a concentrated policy approach, Cyprus’s net debt ratio would only be about one-seventh of the ratio under the no-policy-change base case. The theoretical sovereign rating would still be in the ‘A’ category even by the middle of the current century. Alternatively, if the government leaves social security and other age-sensitive expenditure programs untouched but delivers an up-front fiscal consolidation, balancing the books by 2008, the net debt ratio in 2050 would be two-thirds of the outturn under the base-case simulation. The ‘A’ theoretical rating would fall into the ‘BBB’ category by 2025, and then fall further into the speculative-grade category. «Comparing the two scenarios suggests that the key challenge to the sustainability of Cyprus’s public finances lies in curbing age-related spending,» said Zhang. «The weak fiscal position also plays a role, but under current trends is the smaller threat.»