By Hamza Hendawi
THE GOVERNMENT plans to raise the equivalent of $300 million abroad through an international bond issue expected to be denominated in the euro.
Bankers said the money would be used to meet part of the government’s entire 1999 financing requirements, estimated at £735 million, up from last year’s £647 million. The funds may take up to 90 days to be raised.
The issue, which will come up for approval before a plenary session of the House later this week, will be the third since 1997, when the government successfully issued a five-year bond issue worth $300 million. A 10-year $400 million issue followed last year.
The government of President Glafcos Clerides borrows abroad to cover its yawning deficits so as not to increase demand on domestic liquidity with negative results for the economy. Domestic borrowing by the government would place upward pressure on interest rates, making borrowing more expensive and slowing economic growth.
Bankers say that local banks would also be hard pressed to raise the vast amounts required by the government.
News of the government’s plans to borrow abroad coincided with a report by the internationally-respected Moody’s that backed the island’s A2 rating for foreign debt, but catalogued some of the challenges facing the economy as Cyprus moves closer toward the European Union.
Noting that the political environment on the island has recently grown more “fractious,” Moody’s Investors Service said prospects of passing through parliament important legislation to increase revenues and liberalise the financial sector appeared to be less than certain.
“The longer-term outlook for Cyprus’ creditworthiness is therefore increasingly dependent on the near-term prospects for economic adjustment,” said the Moody’s report.
“Moody’s analysts emphasise that the significant widening of the fiscal and current account deficits since 1995 increases the urgency of the economic reform agenda, especially the proposed hike in value added tax rate.
“In addition, financial sector liberalisation, which is crucial to Cyprus’ further integration into the EU, must advance this year with the removal of the interest rate ceiling,” said the report.
The government’s fiscal deficit is projected at close to six per cent of GDP in 1999, while the public debt is forecast at more than 60 per cent. A government attempt to raise more revenue to narrow the deficits failed when the House last May threw out a package of far reaching tax increases.
Moody’s said economic growth averaged 4.2 per cent in the 1994-98 period but warned that structural problems, especially the competitive challenges facing tourism, international business services and industry, lurked ahead.
“In the absence of enhanced flexibility of the labour force or additional investment to enhance productivity, growth is likely to stay well below the historical average,” the report said.
Share prices, meanwhile, resumed their appreciation yesterday when the all- share index closed in positive territory for the fourth successive session.
The index was up 1.63 per cent to close at 118.76, pushing shares up by as much as four per cent since Wednesday.
Most trade was in the banks blue-chips, whose sub-index shot up by 1.53 per cent to close at 145.70. Market leader Bank of Cyprus appreciated by seven cents to close at £5.43, while the Popular Bank raked in 10.5 cents to close at £5.34. Hellenic Bank was up 2.5 cents to close at £3.13.
Only insurances companies ended the day lower, with all six other sectors of the bourse finishing up.
The valued of trade was £4.97 million.
