Rating Agency Moody’s has upgraded Cyprus’ long term credit rating by one notch to Ba1 assigning stable outlook, citing reduced exposure to event risks because of a decrease in banking sector risks, the resilience of the economy during the Covid pandemic as well as robust medium-term GDP growth prospects being supported by sizeable European funds.
In a written statement, Finance Minister Constantinos Petrides welcomed the rating action as extremely important, stressing that it highlights “the sound followed policy which despite the current uncertainty continued pandemic crisis, continue to strengthen Cyprus’ credibility.”
He furthermore stressed “the government will continue to support the economic activity so as when the pandemic ends it will return to pre-pandemic positive rates both as regards growth and employment as well as the public finances.”
Following yesterday’s rating action, Cyprus is one notch below the investment-grade category. The rating follows a two-notch upgrade of Cyprus’ two largest banks, Bank of Cyprus and Hellenic Bank.
“The primary driver for the upgrade of the ratings of Cyprus to Ba1 is the material improvement in the underlying credit strength of the domestic banking system, which also reduces the risks of a systemic banking crisis and therefore lowers the risk of a crystallization of contingent liabilities in the banking system on the government`s balance sheet,” Moody’s said, citing improved asset quality and reduction of non-performing loans.
Although it said that continued uncertainty surrounding the economic recovery, especially in most affected sectors such as tourism, could still result in a further uptick in new NPLs, Moody`s said that its expectation “remains that new inflow of NPEs will be more than offset by banks` sustained efforts to reduce legacy problem loans.”
According to the agency, the second driver for the upgrade of Cyprus ratings is the relative resilience of the economy to the pandemic shock in combination with the robust medium-term GDP growth prospects.
“Despite its sizeable exposure to tourism, the economy of Cyprus proved to be more resilient to the pandemic shock compared to the Ba1- and Ba2-rated medians as highlighted by a less severe contraction of economic activity for Cyprus in 2020 (-5.1% compared to the Ba1- and Ba2-rated medians of 7.1% and 5.6%, respectively),” the agency said, noting that this was because Cyprus`s non-tourism related services such as business services, public administration and shipping softened the significant pandemic shock on the tourism sector.
It also highlighted that “the support measures by the authorities are effective in mitigating the impact of the pandemic shock on the supply side of the economy and therefore materially reduce the risk of lasting impairment on the economic strength of Cyprus.”
“Very effective in reducing the impact of the pandemic related shock on the labour market was the sizeable take-up of the introduced job retention scheme in the form of wage subsidies for affected companies that are required to keep their employees for at least the double duration of the period the scheme was used. Moody`s estimates that this job retention scheme saved around 26,000 jobs or 6% of employment in 2020,” the agency said.
Moody’s said it expects GDP growth to be supported by sizeable European Union (EU, Aaa stable) funding, the gradual recovery of the tourism sector and solid growth in the non-tourism related services over Moody`s current forecast horizon out to 2025.
It added that according to its simulations, the full use of the Recovery and Resilience Fund “will would boost GDP growth by an average of 0.6 percentage points per year in the years 2022-25” without accounting spillover effects from other countries and potential economic gains from reform implementation tied to the RRF funds.
On the stable outlook, Moody’s said credit strengths and challenges are balanced at the Ba1 rating level.