Local
articles | 18 November 2019

DBRS confirms Cyprus at BBB (low), trend raised to 'positive'

DBRS Morningstar has confirmed Cyprus’ Long-Term Foreign and Local Currency – Issuer Ratings at BBB (low) and changed the trend to ‘positive’ from ‘stable’ as the outlook for the downward trajectory in the public debt ratio has improved, driven by sustained robust economic growth, large primary surpluses and early debt repayments.

At the same time, DBRS confirmed the Short-Term Foreign and Local Currency – Issuer Ratings for Cyprus at R-2 (middle) and changed the trend to Positive from Stable.

The rating agency said that while moderating, economic growth in Cyprus is projected at around 3% in 2019 and 2020, among the strongest in the Euro area.

Cyprus’s fiscal position has also continued to improve, with the fiscal surplus reaching sizable levels, and the government is planning to repay the IMF loan in advance next year.

The materialisation of fiscal risks could delay the reduction in public debt, but strong growth, together with large fiscal surpluses and early debt repayments, is still expected to contribute to the decline in the government debt-to-GDP ratio over the coming years.

The improvement in DBRS Morningstar’s building block of ‘Debt and Liquidity’ was the key factor for the trend change.

The rating agency added that the BBB (low) ratings are supported by Cyprus’s solid budget position, its prudent public debt management framework, its Eurozone membership fostering sustainable macroeconomic policies, and its openness to investment encouraging a favourable business environment.

Nevertheless, Cyprus also faces significant credit challenges related to sizable non-performing exposures (NPEs) in the banking sector and the economy, high levels of private and public sector debt, external imbalances, and the small size of its service-driven economy, which exposes Cyprus to adverse changes in external demand.

It warned that the ‘positive’ trend could be changed back to ‘stable’ if growth weakens significantly and the fiscal position worsens substantially.

A reversal of the downward trajectory in NPEs could also be negative for the ratings.

Risks to the fiscal outlook include the pending Supreme Court ruling on the public sector wage cuts during the crisis and risks associated to the financial sector.

While the government has started the gradual reversal of wage cuts, a court ruling against the government could lead to an immediate reversal, impacting fiscal accounts in the near term.

So far in 2019, the reduction in NPEs has continued but it has been limited. In the year to May – the latest data available – the stock of NPEs has fallen by just over 1%. The total NPE ratio has remained at 31.0%, although down from a 49.0% peak in May 2016. In part, the still high ratio reflects the reduction in bank loan portfolios as households and businesses deleverage.

The NPE reduction this year has been mainly organic, including through cash repayments, debt-for-assets swaps, and write-offs.

By segment, the SME NPE ratio fell to 37.2% in May 2019 from 39.2% in December 2018, the large non-financial corporations NPE ratio declined to 18.1% from 19.0%, while the household NPE ratio has remained virtually unchanged at 37.7%.

In September 2019, the government started to implement its social scheme (‘Estia’), a main pillar of its NPE reduction strategy aimed at tackling NPEs related to retail mortgages, which account for about half of total NPEs.

The scheme seems unlikely to lead a material reduction of NPEs in the Cypriot economy, as the level of participation has been low so far.

Looking ahead, DBRS expects further progress in NPE reduction to be largely driven by the banks’ efforts. Sales of banks’ NPE portfolios are expected next year. Cypriot banks remain profitable, and their capital levels and loss loan provisioning have been raised to adequate levels and above the European average.

Factors also helping with the reduction of NPEs are falling unemployment, rising house prices, and solid economic growth.

Partly driven by the strengthening of the Cypriot economy, the housing market has continued to recover, with prices growing by 2.7% year-on-year in Q1 2019, according to the Central Bank of Cyprus index.

Source: Financial Mirror

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