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The Republic of Cyprus is expediting its return to the financial markets, seeking to leverage recent credit rating upgrades by Fitch and Standard & Poor's, which have elevated the country's creditworthiness to BBB+. The back-to-back upgrades over the past two Fridays have prompted Cyprus to move forward with a market entry on Wednesday, foregoing plans to delay the debt issuance until September.
The initial round of ratings from the agencies concluded positively, likely attracting numerous investors to the issuance of a 7-year, €1 billion EMTN bond. Using the Fitch and S&P upgrades as leverage, Cyprus is expected to secure better loan terms, validating its earlier decision to delay the market entry from April. This move also demonstrates Cyprus' resilience amid broader political uncertainties, such as the dissolution of the French Parliament and turbulence in the euro markets.
In less than 10 days, on June 27, an 850 million euro 7-year EMTN bond issued by Cyprus in 2017 will mature. The financial requirements for 2024 are set at €1.3 billion. The upcoming bond will not be classified as sustainable or green, as Cyprus issued its first green bond only in the second quarter of 2023, and these bonds do not necessitate annual market entries.
Fitch and S&P's June upgrades to BBB+ were preceded by favourable ratings from Scope, Moody's, and DBRS over the previous three months. Moody's upgraded the economic outlook from stable to positive in May, suggesting a potential future upgrade. Scope issued an update report without a rating in May, while DBRS maintained its BBB (high) rating with a stable outlook in March.
Fitch and Standard & Poor's acknowledged improvements in Cyprus' credit metrics, reduced banking sector risks, private sector deleveraging, robust fiscal performance, and resilience to external shocks.
Fitch's upgrade and positive outlook reflect reduced vulnerability to financial shocks, resilience to external reactions, and favourable medium-term fiscal trends, driven by a strong commitment to fiscal prudence. The banking sector's credit profile has strengthened due to improved asset quality, increased profitability, and significant liquidity and capital buffers. Combined with substantial private sector deleveraging over the past decade, this has reduced risks to macroeconomic stability. The non-performing loans (NPLs) ratio was 7.9% at the end of 2023, the lowest since the global financial crisis. Asset quality is expected to improve further due to strong growth and stable labour and housing market prospects.
Fitch highlighted Cyprus' strong fiscal performance since 2022, with a favourable outlook for public finances. It projects an overall surplus averaging 3.1% of GDP in 2024-2025, similar to 2023, with a primary surplus of 4.5%, the highest in the eurozone.
S&P noted that the upgrade reflects Cyprus' progress in addressing fiscal imbalances amid resilient growth. It predicts that General Government gross debt will fall below the 60% Maastricht Treaty threshold by 2027. Last year, the government surplus stood at 3.1% of GDP, exceeding expectations due to rising employment, strong private sector consumption, and higher Social Security contributions. Despite spending pressures, S&P believes the government will achieve an average consolidated budget surplus of 2.1% of GDP in the 2024-2027 period, its strongest forecast for the eurozone.
S&P's report indicated that, after slowing to 2.5% last year, growth will accelerate to an average of 3% in the 2024-2027 period. It highlighted that economic activity has diversified significantly in recent years, allowing Cyprus to overcome the impacts of the global pandemic, EU sanctions against key trading partners, and the recent Israel-Hamas conflict. S&P expects Cypriot authorities to maintain a focus on fiscal sustainability by implementing reforms linked to the Recovery and Resilience Fund, addressing the cost-of-living crisis, and reforming the banking sector.
[Summary of Panayiotis Rougalas' original story in Greek published in Kathimerini's Cyprus edition]
