Filenews 3 September 2022
Standard and Poor's upgraded Cyprus' long-term credit rating by one notch, to the BBB from BBB-, assigning a stable outlook, citing the diversified Cypriot economy which proved resilient to exogenous shocks.
"The upgrade reflects the relatively robust performance of the Cypriot economy over the past decade and our assessment that this will continue, despite the effects of the war in Ukraine," the agency said in its assessment act late last night.
In fact, the agency upgraded its GDP growth forecast this year to 4.5% from 2.7% previously.
It estimates that strong economic growth is expected by 2025, supported by robust domestic demand and the ongoing recovery of the tourism sector.
According to S&P's, the stable outlook outweighs the risks that the effects of the war in Ukraine will significantly weaken the Cypriot economy, in the face of the diversified structure of the economy and resilience to exogenous shocks "and our expectation that the fiscal position will continue to improve".
As S&Ps reports, while the war in Ukraine will continue to weigh on the state budget this year, it nevertheless expects the budget deficit to be reduced to 0.9% due to measures to support the economy and households from high energy prices.
The agency highlights the resilience of the Cypriot economy to the coronavirus pandemic in 2020 and the strong recovery of GDP by 5.5% in 2021 after the contraction of 5% last year.
The agency also upgraded its estimate for the growth rate in 2022 to 4.5% from 2.7% "despite relatively strong ties with Russia, which we expect to burden the business services sector, although tourism activity remains strong." It also expects robust economic growth, which will be resilient to increased risks, strongly supported by the disbursement of the €1.2 billion Recovery and Resilience Plan over the period 2021-2026.
In addition, the agency expects that government policy will remain committed to reducing financial vulnerabilities and improving the soundness of the financial sector.
The S&P's expects public debt to decline sharply by 2025 on the basis of fiscal consolidation and dynamic economic activity. In particular, it estimates that by 2025 the debt will fall to 75% of GDP with interest payments to about 4% of public revenues from 5.4% in 2020.
It cites the favourable maturity profile of the public debt, but also the significant liquid reserves, which cover the financing needs of at least the next nine months, thus significantly reducing the short-term financing risk.
It notes, however, that the rating remains limited due to the high levels of public and private debt and the still high ratio of non-performing loans (NPLs) in the banking system, despite their large decline since the 2013 crisis period.
In particular, for the stock of NPLs, the firm points out that these have decreased significantly in recent years, mainly due to sales of NPL packages by the two largest banks on the island but remains important compared to other European banks.
It also notes that the impact of the pandemic on NPLs has been limited but expects that the large proportion of stage 2 loans (increased credit losses), representing 15% of total loans compared to 9% of the EU average, coupled with the high concentration in the tourism sector, which continues to recover, could lead to a deterioration in asset quality.
Noting that the current economic environment is likely to delay the improvement in asset quality, the agency points out at the same time that a possible success of the government's rent-versus-mortgage plan could support mortgages worth up to €250,000, thus reducing the NPL ratio by 1.7%.
However, even without a significant reduction in NPLs, the firm considers that the banking sector's risk to the state is mild.
Moreover, S&P's notes that it could further upgrade Cyprus' rating following an improvement in the stability of the financial sector, and a further reduction in NPLs, enhanced efficiency of monetary policy transmission and improved access for banks to debt issuance on capital markets.
On the contrary, he says, a downgrade could occur if the impact of the war in Ukraine significantly weakens the growth prospects of the Cypriot economy or significantly slows down fiscal consolidation, compared to our estimates, threatening the pace of public debt reduction.
