Fitch has affirmed Cyprus’s ‘BBB-‘ rating, keeping its outlook stable

Fitch Ratings has confirmed the long-term credit rating of Cyprus in foreign currency as “BBB-“, maintaining, however, the outlook for the Cypriot economy stable.


The US rating company expects nominal GDP growth in 2022 to 4.7% – 1.6 percentage points higher than its previous estimate – and growth to slow in 2023 to 1.8%.


It also estimates that inflation will rise to 7.9% in 2022, before easing to 4.9% in 2023, due to lower oil prices.


Justifying its rating, Fitch says that “although the Cypriot economy has had a robust post-pandemic recovery and government finances have proved resilient, the worsened outlook for eurozone growth and uncertainties related to Cyprus’s high exposure to Russia through its investment and tourism linkages pose significant risks.”


According to Fitch, Cyprus’ ‘BBB-‘ rating is supported by governance indicators and GDP per capita that are well above the average for countries rated in the ‘BBB’ category. The report notes that institutional strengths and policy credibility are backed by eurozone membership, although, these strengths are balanced by high levels of private and public sector indebtedness, large external imbalances, and vulnerabilities in the banking sector.


The rating agency expects a slowdown in the Cypriot economy from the second half of 2022, due to the intensifying energy crisis in Europe and high inflation, although headline GDP growth is projected to be 1.6pp higher than their forecast six months ago, at 4.7% in 2022. In 2023, recession in the eurozone (Fitch forecasts -0.1% real GDP growth), will slow growth in Cyprus to 1.8%.


Regarding general government fiscal deficit it is expected to reach 0.5% of GDP this year, below the projected median deficit ratio of its ‘BBB’ rating category (4.5%), and narrowing 1.2pp from a deficit of 1.7% in 2021. It is also noted that over the first seven months there was a general government surplus of €142 million, compared with a deficit of €711 million in the same period of 2021, “with the improvement largely reflecting the expiry of pandemic-related support”.


According to Fitch, Cyprus’ public debt-to-GDP ratio is fast declining towards its pre-pandemic level, recording the second largest decrease in public debt amongst EU economies. For 2022, Fitch forecasts a further decline in debt to 91.7%, a decrease of 11.9pp, reflecting strong GDP growth and a reduction in the government’s cash buffer (13.6% of GDP at end 2021).


New measures to offset higher energy prices and a weaker economic outlook than the baseline “pose a downside risk to our medium-term debt projections”, which have debt falling below 85% of GDP by 2024, the report states.


Regarding inflation risks, Fitch notes that Cyprus does not import natural gas, so is not directly exposed to the risk of gas shortages facing Europe this winter. However, Cyprus is entirely dependent on imports of oil and petroleum products for its electricity generation, which leaves inflation and terms of trade highly sensitive to changes in global oil prices.


Additionally, the rating agency forecasts inflation to average 7.9% in 2022, before declining to 4.9% in 2023 owing to lower oil prices, while wages will increase in 2023, as a result of the automatic wage indexation (to half of the increase in inflation of the previous year). The agency considers the risk of a potential wage-price spiral to be low.


Fitch’s Banking System Indicator (BSI) for Cyprus at ‘b’, is among the weakest of rated European sovereigns. The reports recognizes that notable progress has been made in the sale and write-off of legacy non-performing loans (NPLs), with the ratio to total gross loans declining to 11.2% in June 2022, vs 17.9% in December 2020.


“However, the weaker economic outlook could pressure borrowers in certain sectors of the economy and slow new lending, which remains below pre-pandemic levels”, it notes, adding that loan exposure to vulnerable sectors (tourism, transport, real estate and construction) is relatively large (approximately 34% of total sector portfolio, June 2022).


Loans classified under Stage 2 are also high, at 15.5% of total loans and advances (March 2022), compared with the EU average ratio of 9.1%.


Finally, Fitch states that further progress in NPL resolution will partially depend on the success of the authority’s plan of a Mortgage-to-Rent scheme under state-owned KEDIPES, still pending approval from the European Commission.


Source: Cyprus News Agency

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