articles | 01 September 2014

Capital Intelligence affirms Cyprus' outlook as stable

Capital Intelligence (CI), the international credit rating agency, affirmed recently Cyprus' Long-Term Foreign Currency Sovereign Rating of 'B-', and its Short-Term Foreign Currency Rating of 'B', with an outlook for the ratings affirmed at 'stable'.

At the same time, the economy is tentatively expected by CI to return to positive growth by the end of 2015.

According to the announcement, the ratings of Cyprus reflect declining short-term financing risks, underpinned by the good progress made by the government in delivering on the economic programme agreed with and fully backed by Eurozone member states (through the European Stability Mechanism, ESM) and the International Monetary Fund (IMF).

The ratings also take into account better-than-expected fiscal and economic performance, with key outturns exceeding targets in 2013, as well as tentative signs that the banking sector is beginning to stabilise, and renewed – albeit limited – government access to international capital markets.

The agency notes that the government has successfully completed four rounds of review by the group of international lenders (the troika), having met the main conditions requested in the Memorandum of Understanding (MoU).

Reforms implemented so far have included large scale restructuring of the banking system (including the recapitalisation of the cooperative banks), measures to strengthen fiscal discipline, and the adoption of legislation enabling the privatisation of state owned entities.

CI’s baseline scenario, according to the announcement, assumes that the government’s commitment to reform is sufficiently strong to ensure further disbursements of ESM-IMF assistance and the avoidance of any funding gaps, at least over the next 12 months.

However, it is pointed out that there is an on going risk that the programme could suffer setbacks that may possibly disrupt future disbursement of funds, particularly in view of the significant opposition to some of the required reforms, especially foreclosure legislation – which is currently being debated in parliament.

At present, public sector debt is expected to gradually decline towards 105% of GDP by 2020. However, debt dynamics could easily reverse and are sensitive to various risks, including weaker-than-expected economic growth, fiscal slippage, or additional bank recapitalisation needs.

Source: Famagusta Gazette

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