Credit rating agencies are getting ready for a new outlook on Cyprus’ economy but not before they see developments in the state of play of non-performing loans and of the ever-high government payroll.
A decrease in the prevailing high level of non-performing loans along with one in the public and private debt are the main issues that rating agencies are currently focusing upon.
In addition, another factor expected to affect public finances in 2020 is the Supreme Court’s decision on whether to return the cuts in wages and pensions of public servants. These actions were taken at the time when the island’s economy was in ruins.
The agencies still expect that by the end of 2020 more than €4 billion of Cyprus’ current banking system’s €10 billion NPLs in reserve will be available through direct sales or by securing loans. This action will reduce NPLs to below a 20% -30% ratio that was the case in June 2019.
However, the agencies seem to no longer expect government-subsidized ‘Estia’ mortgage plan to be the primary factor that will reduce NPLs to 10% by 2021.
Moody’s have also warned that they could shift from positive to negative the outlook for the Cypriot economy if the downward trend in debt is reversed. Or if recent legislation on the banking sector fails to significantly reduce red loans.
At the same time, DBRS expects further progress in reducing NPLs pending new sales of red loan packages. Cypriot banks, they noted, remain profitable with capital levels and the ability to absorb reduced loans to rise well above the European average.
As for Fitch, they expect budget surplus to remain close to 2% of GDP in the years 2020-2021, well above the EU’s requirements. The Supreme Court’s pending decision to reverse public sector wage cuts represents moderate budget risk, with an estimated annual cost of around 0.8% of GDP by 2022, they also noted.