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23° Nicosia,
20 July, 2019
 

Cyprus recovery is being recognised by international agencies

Fitch is the latest credit agency to upgrade the country's investment outlook

Newsroom / CNA

Cyprus' economic upturn and stable recovery is being reccognised by international credit rating agencies, said Finance Minister Harris Georgiades.

He comments came after Fitch rating agency upgraded Cyprus` Long-Term Foreign-Currency Issuer Default Rating (IDR) to `BB+` from `BB` with a positive outlook. The rating is just one step before the investment scale.

Georgiades wrote on Twitter that there are still some difficulties ahead that need to be addressed, but was confident of better results.

"We still have difficulties that we need to address. But the progress of our country is being recognized. And we can raise Cyprus even higher, as long as we continue the effort with confidence, consistency and collective responsibility," the Minister tweeted.

Fitch said that future developments that may, individually or collectively, lead to an upgrade include the reduction in banking sector NPEs that materially reduces the sovereign`s contingent liabilities, track record of declining GGGD/GDP ratio and continued deleveraging of the private sector.

It does not currently anticipate developments with a high likelihood of leading to a downgrade.

"We can raise Cyprus even higher, as long as we continue the effort with confidence"

Getting a negative rating action would mean failure to improve asset quality in the banking sector and deterioration of budget balances or further materialisation of contingent liabilities that results in the stalling of the decline in the government debt-to-GDP ratio.

In its key assumptions, it notes that gross government debt-reducing operations such as future privatisations are not considered in Fitch`s baseline scenario.

The projections also do not include the impact of potential future gas reserves off the southern shores of Cyprus, the benefits from which are several years into the future.

Fitch says that it does not expect substantial progress with reunification talks between the Greek and Turkish Cypriots over the next quarters, noting that "the reunification would bring economic benefits to both sides in the long term but would entail short-term costs and uncertainties".

"The government tapped international markets in June 2017 and external interest payments are set to decrease to 6.6% of current account receipts in 2018-2019, down from an average 16.2% in 2011-2012. Cyprus is also attracting large foreign direct investments in the construction, tourism, energy and education sectors.

Cash reserves were 1.2 billion euro at end-2017 covering expected gross financing needs for 2018".

Fitch says that Cyprus`s fiscal performance has benefited from a very strong cyclical economic recovery, and prudent fiscal policy.

"We forecast the government will continue recording fiscal surpluses of 1.1% of GDP in 2018 and 2019, after over-achieving its fiscal target in 2017 with an estimated surplus of 1.9% of GDP, compared with a `BB` median fiscal deficit of 3.2%.

"A dynamic labour market and sustained economic momentum will support revenues while the recent agreement with trade unions limiting the payroll rise to nominal GDP growth and the hiring freeze adopted in the public sector will help contain current spending".

It said private sector debt and non-performing exposures (NPEs) remain high and are still weighing on new lending, "but we believe economic growth would be resilient to a possible acceleration in NPEs normalisation. The recovery relies largely on foreign-financed investments, which should minimise any contraction in domestic demand".

Households` deposits are also substantial at 123% of GDP at end-2017, twice the stock of households` housing loans, and strong employment growth and rising wages would help smooth private consumption if debt service costs were to increase.

Furthermore it says that deleveraging of the private sector is ongoing, with households` and corporate debt (excluding non-financial SPEs) declining by 5pp in 3Q17 to 250% of GDP adding that increased earnings, ongoing resolution of mortgage arrears, recovering house prices and upcoming legislative reforms enhancing the foreclosure and insolvency framework might foster further debt repayment.

Bad loans remain a weakness

According to Fitch, Cyprus`s `BB+` IDRs also reflect the following key rating drivers mainly that the weakness of the banking sector remains a risk to public finances and weighs on Cyprus`s credit profile.

"The government deposited 2.5 billion euros in Cyprus Cooperative Bank (CCB) in April 2018 to alleviate depositors` concerns ahead of the expected sale of the state`s majority stake in the bank and following a recent outflow of deposits from CCB.

We expect this to lead to an increase in the GGGD/GDP ratio to 104% of GDP in 2018, from 97.5% in 2017".

Noting that the ratio of NPEs to total loans declined gradually to 42.5% at end-2017 (109% of GDP), down from 46.4% at end-2016, it adds that the decline stems from rising repayments, debt restructuring, loan write-offs and large recourse to debt-to-asset swaps.

However, Fitch says, developments were uneven across banks, as the country`s two largest domestically-oriented banks, Bank of Cyprus (BoC) and Hellenic Bank (HB) progressed faster than its cooperative sector, where NPEs were 59% of total loans at end-September 2017.

"Unreserved NPEs for the sector amounted to 11 billion (57% of GDP) at end-2017, which could lead to some capital shortfall if losses were to crystallise and higher than expected haircuts were incurred when liquidating underlying collateral.

This level of NPEs is very significant relative to the overall banking sector common equity Tier 1 capital of 5.4 billion at end-2017".

"However, non-resident deposits still represent a quarter of total deposits at BoC and a half at HB. These are largely short-term funding and confidence-sensitive and would likely become more volatile than domestic deposits in case of stress," Fitch concludes.

TAGS
Fitch  |  rating  |  Cyprus  |  economy  |  banks

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