International rating agency, Fitch, on Friday affirmed Cyprus' Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' assigning a Stable Outlook, assuming that fiscal surpluses will continue despite economic slowdown, whereas the island's declining public debt trajectory will continue albeit with a slower pace.
Furthermore, the agency revised its projection for economic growth this year to 2.5% from its previous estimate of 2.1%. Yesterday's affirmation follows the upgrade by one notch to 'BBB' last March.
On the Fiscal side, Fitch said that the general government balance will remain in surplus over the next two years, despite some balance-decreasing measures to address the cost-of-living crisis, such as the adjustment in the wage indexation mechanism for public sector wages from half to two-thirds of the previous year's inflation rate, adding that the expected impact will amount to 0.1% of GDP this year and 0.3% of GDP in 2024.
'We expect the fiscal surplus to decline from 2.1% of GDP last year, to 1.7% this year and then remain broadly unchanged at 1.8% in 2024,' the agency added, noting that a risk to the public finance projections is the potential impact of the Mortgage-to-Rent scheme, a plan to assist vulnerable non-performing home owners to retain their home, although the agency said that the scheme's conditionality implies a limited likely impact on the public finances.
The agency said that Cyprus public debt to GDP ratio will continue its downward path, albeit with a slower pace following its sharp decline in 2022 to 86.5%, due to the budget balance turning to a surplus and double-digit nominal GDP growth.
'We forecast a continued, albeit slower decline of the debt ratio to 80.9% this year and 73.2% in 2024. This would still leave the debt ratio substantially higher than the 'BBB' median forecast of around 56%,' Fitch added.
Moreover, the agency expects that the Cypriot authorities 'will preserve a sizeable liquid asset buffer,' and regularly issue bonds to cover, at least in part, upcoming debt amortisations.
While yields on Cypriot bonds remain high, we expect the interest burden to increase at a moderate pace, and the average interest rate on debt to increase from 1.7% in 2022 to 2.1% in 2024, the agency added.
According to Fitch, following last year's strong GDP expansion despite the surge in commodity prices and the war in Ukraine, economic growth will slow to 2.5% this year, up from 2.1% in our review in March, 'as domestic demand is constrained by rising interest rates and still high prices impact real incomes.'
The agency added that growth will accelerate to 2.8% in 2024.
On the banking sector, Fitch said asset quality in the Cypriot banking sector has continued to improve, with the non-performing loan (NPL) ratio declining to 9.3% in March, from 11.4% a year earlier.
It also pointed out that the share of Stage 2 loans (loans that exhibit credit deterioration) has remained stable since the start of the year, at 12%, 'implying that the risk of a large inflow of new NPLs has not yet materialised.'
According to Fitch, banking sector solvency has improved, driven by increased profitability in an environment of higher interest rates, with the common equity Tier 1 capital ratio increasing to 17.7% by end-2022, from 17.1% a year earlier.
Furthermore, the agency noted that Cyprus current account deficit is expected to narrow to 5.8% this year following last year's deficit of 9.1% of GDP in 2022 as a result of high imported oil prices and strong domestic demand.
Source: Cyprus News Agency