Cyprus’ sovereign debt rating was upgraded by the ratings agency to B+ with a positive outlook last April, following successive downgrades that had left it with a B- rating with a negative outlook.

The B+ rating is still short of investment-grade rating by three ratings tiers.

Fitch said that “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” and noted that “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”.

It added, however, that a number of factors “continue to weigh heavily on Cyprus’ credit profile”, noting that the government debt was close to 109% of GDP in 2015, “reducing Cyprus’ fiscal scope to absorb domestic or external shocks” and the banking sector’s “exceptionally weak asset quality”, with assets four times the country’s GDP, which “undermines economic stability and growth”.

“The country’s weak external position implies that further economic rebalancing may be in prospect over the medium term,” Fitch said.

Commenting on the Fitch report, Finance minister Harris Georgiades said the findings and recommendations of rating agencies must be taken into consideration, as they “outline the context of our next moves”.

In a written statement, Georgiades said that “it is important to realise the significance of positive assessments and the substantial benefit that will come from further upgrades of Cyprus’ credit rating”.

At the same time, he added, the findings and recommendations of the rating agencies must be carefully considered, as they “outline the context of our next moves in the post-Memorandum (of Understanding) period, which will lead to the full and final restoration of trust toward our country”.

The rating agency also noted that economic recovery is underway, following three years of contraction resulting in a cumulative 11% loss of output until end-2014, and projects GDP growth of around 2% per year for 2016-17, supported by household consumption benefiting from a decline in unemployment, and a pickup in tourism and investment.

Furthermore, it said that banks remain fundamentally weak and pose an ongoing risk to the economy and public finances.

“The ratio of consolidated sector NPEs (non-performing exposures) to total loans stood at 45% in December 2015, one of the highest of Fitch-rated sovereigns, though down from a peakof over 50% in 2014,” Fitch noted.

“Major steps have been taken to restructure the banking sector, but some 30% of restructured loans since January 2014 were in arrears (including of short duration) by end-2015.”

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”.

The gross general government debt is projected by Fitch to decline to below 100% by 2017.

Fitch sees progress with structural reforms, including selling the Limassol port and issuing a license for a casino resort, but added that a number of bills are currently awaiting discussion in parliament following the upcoming legislative elections in May.

“The improved economy and exit from the adjustment programme could reduce the urgency for reform,” the agency warned.

Finally, it said that a deal on the solution of the Cyprus problem “would benefit both sides”.

Source: Cyprus Mail