Normal and Poor’s has affirmed Cyprus’ long-term credit standing at BBB- sustaining a constructive outlook.
The credit standing company additionally famous that regardless of the disaster in Ukraine and doable spil-overs as a result of sanctions in opposition to Russia “medium-term financial prospects stay stable.”
It added: “Whereas we anticipate the disaster in Ukraine to weigh on Cyprus’ financial performances through the sanctions imposed on Russia, an vital financial companion, medium-term financial prospects stay stable, with development anticipated to common 3.2% per 12 months over 2023-2025.”
Because the company famous, whereas development ought to underperform this 12 months on extreme stress on the Russian economic system, we anticipate stable financial exercise, strongly supported by the disbursement of the €1.2 billion EU Resilience and Restoration Facility (RRF) over 2021-2026.
“We anticipate escalation of the navy intervention in opposition to Ukraine and the related sanctions taken by Western international locations in opposition to Russia will weigh on financial exercise in Cyprus in 2022 given the 2 international locations` shut financial and monetary relations, along with pushing up the power import invoice globally,” S&Ps added.
The company mentioned the closure of Cyprus airspace to Russian plane will have an effect on vacationer arrivals from Russia, Cyprus’ second largest vacationer market, though “a powerful rebound in arrivals from EU international locations might partially offset that.”
It additionally identified that Russia (together with dual-nationality residents) can be a key marketplace for enterprise providers, which accounts for 11% of Cypriot GDP and a big share of general exports. With sanctions affecting key systemic Russian monetary establishments, we anticipate this might additionally to detract from exercise on this sector, at the least in 2022, the company famous.
Nonetheless, S&Ps famous that “direct publicity to Russia by means of loans and deposits must be restricted for the Cypriot banking system, though some smaller gamers might show larger focus.”
“We additionally anticipate spillover results on Russian financial exercise might considerably have an effect on volatility of buyer deposits in Cyprus, though the constructive funding hole offsets this, with system buyer deposits overlaying buyer loans by over 1.8x at end-2021”, the company mentioned, noting that Cyprus banks have decreased their reliance on international deposits, and liquidity within the system is enough.
It additionally mentioned that whereas Cyprus` inventory of problematic property has declined materially not too long ago primarily due to market gross sales, it stays sizable in contrast with these of European banks (about 14% of gross loans at year-end November 2021 versus 30% at end-2019).
“The excessive focus in the actual property sector (13% of the mortgage e book) and tourism (9%), coupled with the excessive share of loans categorised as stage 2 (about 15% of loans) might end in some asset high quality deterioration and delay the general cleanup of banks` tail dangers from the 2012 monetary disaster”, mentioned the company.
“Nonetheless, supportive fiscal and financial measures, coupled with banks` restructuring efforts for extra susceptible sectors, will partly include the harm and unfold the affect on banks` asset high quality throughout a number of years”, it mentioned, estimating that credit score provisions will stay considerably above normalized ranges (at about 1.1% of gross loans, on common) and NPE ratio will seemingly hover at 9%-14% over 2022 and 2023.
With regard to public funds, the company mentioned that following the COVID-19-induced recession in 2020, the Cypriot economic system recovered sooner than anticipated in 2021, with actual GDP development estimated at 5.5% with GDP development estimated to speed up to a median of three.1% per 12 months from 2022-2025 .
It additionally identified {that a} a lot stronger efficiency in authorities income mobilization led to a pointy decline within the basic authorities deficit to 1.8% of GDP final 12 months, regardless of still-high expenditure within the context of the pandemic.
Furthermore, the company mentioned that public debt which rose considerably to 115% of GDP as a result of Covid-19 pandemic in 2020, including that pubic debt will proceed declining on the again of financial restoration and budgetary consolidation.
“Because the budgetary performances enhance on a gradual withdrawal of fiscal stimulus and because of stable financial efficiency, authorities debt began declining in 2021 and we anticipate this pattern to proceed, with basic authorities debt reaching about 80% of GDP in 2025” the company mentioned.