International Rating Agency, Fitch, revised the rating of Cyprus long-term rating to positive from stable, citing economic resilience, fiscal surpluses with continued reduction of public debt as well as the improved banking sector metrics.
In a rating action, issued on Friday evening, the agency affirmed Cyprus long-term issuer rating to ‘BBB’. The agency upgraded Cyprus’ rating in March 2023, a rating affirmed last June.
According to Fitch, the Cypriot economy has remained relatively resilient this year, with GDP increasing by 2.5% on an annual basis in the first three quarters of 2023.
“Faster economic growth in 2H24 should translate into GDP growth of 2.7% for next year. Continued expansion in domestic demand and sizeable inflow of EU funds along with improved macroeconomic conditions among Cyprus’s main trading partners, will support growth further in 2025, when we expect the growth rate to pick up to 3.0%,” it added.
However, the agency pointed out that a risk to macroeconomic developments and external finances is a further escalation of geopolitical tensions in the Middle East, which may affect investment and tourism links between Cyprus and Israel. “The latter has grown in importance as a trade partner and source of investment in recent years,” the agency added.
Fitch expects Cyprus will register a general government budget surplus this year of 2.3% of GDP, higher than the 1.7% project at the previous review in June.
“Despite the extension of support measures to mitigate the impact of high prices and assumed fiscal costs from the Mortgage-to-Rent scheme, we expect a further surplus for next year and 2025 (averaging 2.2% of GDP),” Fitch noted, pointing out that “we assess that the Cypriot authorities are committed to maintaining sufficient primary surpluses to bring about a sustained reduction of the government-debt-to-GDP ratio.”
According to Fitch, the estimate that government debt is estimated to decline to 79.6% of GDP at the end of this year, 6pp lower than at end-2022.
“We expect the debt ratio will fall to 73.5% of GDP next year, and 67.4% of GDP in 2025,” the agency added.
The agency assumes that the Cypriot authorities will preserve a sizeable liquid asset buffer, while regularly issuing bonds to cover, at least in part, upcoming debt amortisations.
“While yields on Cypriot bonds remain high, we expect the interest burden to increase at a moderate pace, with the interest-to-revenue ratio increasing from 3.4% this year to 3.9% by 2025,” Fitch said.
Furthermore, the agency cites improved Banking Sector Metrics, noting that Non-performing loans (NPLs) have continued to decline at a moderate pace, with the NPL ratio decreasing to 8.6% in August from 10.9% in August 2022 (it peaked at 50.2% in November 2014).
Moreover, stage 2 loans (loans with significant credit deterioration) have remained stable as a proportion of total loans this year, “implying that the risk of a rise of new NPL inflows is limited,” the agency said.
According to Fitch, a resolution of the uncertainty surrounding the legal framework for foreclosures, currently discussed in parliament, may support further reductions in NPLs and private sector debt ratios, which remain high but on a declining trend, with the household debt-to-GDP ratio was 69.3% in 2Q23, down from 76.3% a year earlier.
The agency also noted that positive trends in bank profitability driven by higher interest rates have translated into improvements in solvency metrics for the banking sector, with the common equity Tier 1 ratio reaching 18.9% in June, up from 17.7% a year earlier, and higher than the EU average (15.95% in 2Q23).
Fitch rating a recognition of government planning, President says
The confidence shown by the rating agencies is an acknowledgement of the government’s planning, which is being implemented with the governance programme as a compass, President of the Republic Nikos Christodoulides said on Friday.
“The new revision of the Cypriot economy outlook, this time from stable to positive, by the Fitch Rating Agency, emphatically confirms the path of progress and growth. A path based on the responsible economic policy pursued by the Government,” President Christodoulides said in a written statement.
The confidence shown by the rating agencies, he adds, “is a recognition of the government’s planning implemented with the governance programme as a compass.”
“Through fiscal responsibility and the promotion of bold reforms and meaningful policies, we are strengthening our country’s sustainable growth path and prospects, and we continue to shield our economy, accelerating its momentum,” he notes.
He adds that the revision comes just hours after the House of Representatives passed the bills containing a package of measures to tackle NPLs and protect vulnerable borrowers tabled by the government, and while the first annual state budget, which is clearly in surplus, is being discussed.
“Resisting the sirens of populism and pointless scaremongering, we will continue responsibly, consistently and with vision, because this is what the collective interest demands, this is what the high sense of responsibility of our reform vision requires,” the President of the Republic stresses, adding that the successive positive ratings of the Cypriot economy translate into prospects and opportunities, with the Cypriot economy becoming even more outward-looking, resilient and attractive for investment, which also allows for the development of targeted social policies and successful responses to the challenges we face.
“With a plan, a clear vision, boldness and determination, our country is moving forward, creating hope and prospects for all the Cypriot people,” the President of the Republic concludes.
Government to support economy while maintaining fiscal discipline, FinMin says
The government will continue supporting the Cypriot economy and society, while maintaining fiscal viability and fiscal discipline, Finance Minister Makis Keravnos said on Saturday.
His comments came as international rating agency, Fitch has revised the outlook of Cyprus long-term credit rating from stable to positive, affirming its BBB rating.
In a written statement, Keravnos said that the outlook change reflects the agency’s expectations that Cyprus will continue to generate fiscal surpluses, continue to reduce public debt and the improvement of the banking sector’s metrics.
“The government will continue to support the Cypriot economy and the society, in view of the challenges it is called to tackle, with a responsible way, aiming at the sustainability of the public finances and maintaining fiscal discipline,” Keravnos added.
(Cyprus News Agency)