Fitch Ratings has affirmed Cyprus’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B+’. The Outlooks are Positive.
However, Cyprus is undergoing a major financial sector, fiscal, and economic adjustment following the 2013 banking sector crisis and the ensuing EU/IMF bail-out programme. The country’s early exit from the macroeconomic adjustment programme in March 2016 reflects a track record of fiscal consolidation, progress in financial sector restructuring and economic recovery.
A number of factors, however, continue to weigh heavily on Cyprus’ credit profile. At close to 109% of GDP in 2015, gross general government debt is more than twice the ‘B’ median, reducing Cyprus’s fiscal scope to absorb domestic or external shocks.
The country’s weak external position implies that further economic rebalancing may be in prospect over the medium term. Economic recovery is underway.
Furthermore, Fitch projects GDP growth of around 2% per year for 2016-17, supported by household consumption benefitting from a decline in unemployment, and a pickup in tourism and investment. Banks remain fundamentally weak and pose an ongoing risk to the economy and public finances.
Non-performing exposures
The ratio of consolidated sector NPEs (non-performing exposures) to total loans stood at non-performing exposures in December 2015, one of the highest of Fitch-rated sovereigns, though down from a peak of over 50% in 2014.
Moreover, Fitch observes major steps on the restructure of the banking sector. The new regulatory framework put in place since 2015 has enhanced the restructuring toolkit and contributed to a rise in restructurings, albeit from a low level.
However, some 30% of restructured loans since January 2014 were in arrears (including of short duration) by end-2015. Progress is ongoing in bank supervision, both through the central bank and the EU Single Resolution Board, in full effect from January 2016.
According to the international rating agency Cyprus delivered a general government deficit of 0.5% of GDP for 2015, after a deficit of 0.2% in 2014. Fitch projects budget surpluses of 0.2% and 1% of GDP for 2016 and 2017, respectively, reflecting a neutral fiscal stance that is supported by the economic recovery.
Structural reforms
Progress has been made with structural reforms, including selling the Limassol port and Casino. However, a number of bills are currently awaiting discussion in parliament following the May elections.
The improved economy and exit from the adjustment programme could reduce the urgency for reform.
Furthermore, Fitch Ratings believe that if Cyprus manage to reach a reunification deal between Greek and Turkish Cypriots, the deal would benefit both sides in the long term by boosting the Cypriot economy.
Source: Reuters
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