Moody’s Investors Service changed the outlook on the Government of Cyprus’ Ba1 ratings to positive from stable and has affirmed the long-term foreign-currency and local-currency issuer and the local-currency senior unsecured ratings at Ba1.
Concurrently, Moody’s has also affirmed the foreign-currency and local-currency senior unsecured medium-term note (MTN) program ratings at (P)Ba1. The local-currency commercial paper and other short-term ratings have been affirmed at Not Prime (NP) and (P)NP respectively.
An announcement on Friday says Moody’s decision to change the outlook on Cyprus to positive, reflects the strong reduction in Cyprus’ public debt ratio this year which Moody’s expects to continue in the coming years, following a reduction of more than ten percentage points of GDP last year.
It is also due the stronger-than-expected economic resilience to Russia’s invasion of Ukraine (Caa3 negative) and also to the pandemic, coupled with solid medium-term GDP growth prospects, which in turn are supported by the EU’s Next Generation EU package of grants and loans. In the first half of the year, real GDP growth was at 6%, among the strongest performances in the euro area, Moody’s notes.
The rating agency also attributes the decision to ongoing strengthening of the banking sector, with non-performing exposures continuing to decline. It also notes that the banking sector’s exposure to Russia is limited, in stark contrast to the early 2010s.
The affirmation of the Ba1 ratings reflects a combination of comparatively high economic and institutional strength and relatively high exposure to event risks related to the large size of the banking system.
Cyprus’ rating could be upgraded if the sovereign’s fiscal and debt metrics improved broadly in line with Moody’s baseline scenario over the coming 12 months. Continued evidence of strong economic resilience coupled with a high absorption of EU funding and reform implementation of reforms under the National recovery and resilience plan would also support an upgrade, its added.
Further improvements in the banking sector, which would reduce the sovereign’s exposure to banking sector risks, would also be rating positive, Moody’s says.
The positive outlook signals that the rating is unlikely to be downgraded in the near time. However, the outlook would likely be returned to stable if Cyprus’ economic performance turned out materially weaker than expected by Moody’s. A sustained, material deterioration of the government’s fiscal position would also be credit negative, as would a material deterioration of the banking sector’s health.
Source: Cyprus News Agency