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    20 October 2018

    Fitch upgrades Cyprus to investment grade

    Fitch upgrades Cyprus to investment grade

    Fitch Ratings has upgraded Cyprus’ sovereign rating to investment grade, ‘BBB-‘ from ‘BB+’, with a stable outlook as the island expects a 2.7% fiscal surplus this year and continuous growth that will boost receipts.

    The upgrade followed similar action by Standard and Poor’s last month.

    Finance Minister Harris Georgiades took to Twitter to thank everyone for their contribution.

    “Forging ahead,” he added.

    Fitch said the upgrade reflected the buoyant fiscal revenue and prudent fiscal policy, which will see Cyprus record a fiscal surplus of 2.7% of GDP in 2018, compared with a target of 1.7% in the April 2018 Stability Programme Update.

    “We forecast the fiscal surplus will remain high at 2.4% and 2.2% of GDP in 2019 and 2020, respectively, compared with 3.1% and 2.9% targeted in the 2019 Draft Budgetary Plan. Robust economic growth will boost fiscal receipts, while previously adopted hiring freeze and collective agreements will likely limit growth in the wage bill.”

    The rating agency said the island’s public debt will remain on a firm downward trajectory despite a one-off expected increase this year following the placement into Cyprus Cooperative Bank (CCB) of €3.19bn in government bonds (15.5% of GDP) to facilitate the acquisition of part of the state-owned bank by Hellenic Bank.

    The move will raise the debt to 104.4% at end-2018 from 95.7% in 2017.

    “However, we expect large primary surpluses, robust growth and contained nominal effective interest rates will reduce GGGD/GDP to 70% of GDP by 2027.”

    The ratio of non-performing exposures (NPEs) to total loans fell to 40.3% in the first half of the year from 44% in 2017, partly supported by the announced securitisation by Bank of Cyprus (BoC) of €2.7bn gross NPEs.

    The acquisition by HB of CCB’s good assets and the subsequent transfer into a run-off entity of CCB’s €5.7bn NPEs portfolio are estimated to have led to a further decrease in NPEs to 30% in September 2018.

    “This will support a substantial decrease in contingent liabilities stemming from the banking sector, although these remain large.”

    Private sector debt and non-performing exposures remain high, however, at 226% and 97% of GDP in 1Q18, respectively, and constrain credit growth.

    Household and corporate debt stood at 105% and 121% of GDP and a large part of the recent decline in such debt stemmed mostly from high GDP growth, debt-to-asset swaps, loan write-offs, rather than loan repayment.

    “We expect private sector deleveraging will accelerate, however, as enforcement of new legal amendments, improving earnings and recovering house prices foster debt repayment. Economic growth will likely remain resilient to a faster resolution in NPEs as rising wages, a dynamic labour market and high household savings will help preserve disposable income and smooth consumption.”

    Source: Cyprus Mail

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