Capital Intelligence Ratings (CI Ratings) has announced that it has upgraded Cyprus’ Long-Term Foreign Currency Sovereign Rating to BB from BB- and affirmed its Short-Term Foreign Currency Rating at B.
At the same time, the Outlook for Cyprus’ ratings has been affirmed at Positive.
CI Ratings expects the Cypriot economy “to expand by 4.1% in real terms this year and for nominal GDP to return to its pre-crisis level.”
“We expect real GDP growth to average 3.8% in 2018-20, helping to further reduce macroeconomic vulnerabilities and putting debt metrics on a more sustainable trajectory,” it says in its ratings rationale.
According to the international credit ratings agency “downside risks to the outlook appear to be receding with the banking sector showing more solid signs of improvement following the sale of certain assets and liabilities of the troubled Cyprus Cooperative Bank (CCB) to Hellenic Bank.”
Foreign direct investment “is also expected to pick up in the short to intermediate term in light of initiatives to encourage international private investment in new casinos, hotels, marinas, and renewable energy projects.”
However, it warns that “the strong growth cycle remains subject to downside risks stemming from the excessive concentration of activity in construction and real estate and from potentially volatile capital flows.”
CI Ratings also notes that “the overall budget position is expected to register healthy surpluses averaging 1.7% of GDP in 2018-20, provided fiscal discipline is maintained.”
“Given fiscal reforms and more favourable economic conditions, the ratio of general government debt to GDP declined to 97.5% in 2017, below CI`s previous forecast of 102.4%, and is expected to continue its downward trend reaching 86% of GDP in 2020, despite the temporary increase in 2018 related to the sale of CCB,” it says.
According to CI Ratings “short-term refinancing risks appear manageable and the government is currently able to access capital markets at favourable rates.”
The government, it adds, “has been active in pre-financing scheduled debt repayments and actively managing its balance sheet to benefit from favourable market conditions.”
Despite the government’s commitment to post-financial assistance programme reforms, CI notes “that there have been delays in enforcing certain new laws and in implementing specific politically-sensitive reforms, which may be partly attributable to the presidential elections that took place earlier this year.”
It says these measures include reforms to the public sector, including its size and wage bill, a new foreclosure framework, and privatisation.
On banks it notes that bank balance sheets have improved further. Moreover, it adds, “the industry has been relatively successful in regaining depositor confidence.”
“Domestic banks have continued to decrease their non-performing loan portfolio, including the partial sale of problematic loan portfolios to specialised credit acquiring companies,” it continues.
However, the credit ratings agency points out “that risks to the economic outlook remain considerable.”
Despite some deleveraging, the private sector debt overhang persists, although deposits are also sizable, it says.
“At 259% of GDP in 2017, the gross debt of the non-financial private sector (mostly loans from local banks) is extremely large. Household gross debt is equivalent to 119% of GDP, while non-financial corporate debt stands at 140% of GDP,” CI Ratings notes.
(Cyprus News Agency)
