Standard & Poor’s latest credit rating for Cyprus is a confirmation of the rational management of the economy and public finances by the Government despite the negative consequences of the Covid-19 pandemic.
This is what Finance Minister Constantinos Petrides said in a written statement on Saturday, following Friday’s announcement by S&P’s Global Ratings affirming its `BBB-/A-3` long-and short-term foreign and local currency sovereign credit rating Cyprus, with a stable outlook.
The Minister underlined the importance of the affirmation of the Mediterranean island’s rating, despite the fact that the economy is in the midst of the negative effects of Covid-19.
“The rating is a confirmation of the rational management of the economy and public finances by the Government, which is the key to ensuring macroeconomic stability and fiscal sustainability,” he said.
“The key factors that have contributed to the strong confidence in the Cypriot economy are the Government`s permanent commitment to maintain budgetary surpluses, the trend of reducing public debt, the persistent efforts to consolidate the banking sector, as well as the management of the public debt and securing strong cash reserves by the State,” he added.
Petrides also noted that especially under the difficult conditions in the world economy and in the international markets due to the crisis of the coronavirus pandemic and the economic challenges, the Ministry of Finance remains committed to maintaining the credibility of the Cypriot economy.
Standard & Poor’s report expressed the view that Cyprus’ eurozone membership, strong cash position, solid growth prospects, and historically prudent fiscal policies will mitigate the Covid-19 impacts on its creditworthiness.
The report points out that authorities are implementing measures to curb the spread of the virus, while safeguarding incomes and shielding businesses from a temporary, albeit critical, liquidity shock.
It adds, however, that Covid-19 fallout has pushed Cyprus’ tourism-dependent economy into a severe recession and prompted a large deficit in 2020 and estimates that GDP will contract by 7.3% in 2020 before recovering by 5.5% in 2021.
According to S&P the stable outlook captures our view of Cyprus’ solid long-term growth prospects, improving public debt dynamics and track record of running budgetary surpluses against high stocks of public and private debt.
The agency considers, however, the inherent vulnerability of the country`s small open economy, given its large tourism sector and exposure to external shocks, such as the ongoing COVID-19 pandemic.
“We could consider raising the ratings on Cyprus if the banking sector materially reduced its nonperforming exposures (NPEs) and financial conditions improved, alongside faster-than-expected deleveraging in the economy or stronger external performance”, says the report.
Alternatively, it adds, ratings downside could stem from markedly lower-than-projected economic growth in the coming years, impeding private debt servicing and financial sector improvements. A negative rating action could also occur if, contrary to our expectations, fiscal performance does not improve and the general government debt burden rises substantially.
The ratings S&P notes, are underpinned by Cyprus` wealthy economy and solid growth prospects, teamed with policymakers` commitment to operating budgetary surpluses and progress restoring the banking sector`s health.
“We believe that EU membership supports Cyprus` creditworthiness, particularly favourable decisions taken at both the level of the EU and the European Central Bank (ECB) in recent months”, it notes.
While public debt remains high, it points out, proactive debt management has considerably improved the country`s public debt profile, as have the highly supportive monetary policies introduced by the ECB since 2012. Furthermore, it is added, authorities hold significant cash buffers, at least equivalent to nine months of financing needs, reducing short-term refinancing risk.
Rating constraints–which S&P expects will be amplified by COVID-19 impacts–include Cyprus` elevated stocks of public and private debt and the still-high proportion of NPEs in the banking system.
Moreover, the report noted that Cyprus is more vulnerable to external shocks than larger, more diversified economies, because of the country`s small open economy with an important tourism sector, and despite having a fairly diversified services sector, including contributions from professional services, information, communication, finance, and insurance activities.