Moody’s says Cyprus highly susceptible to event risk due to banking sector

US ratings agency Moodys Investors Service said on Monday that Cyprus is highly susceptible to event risk, reflecting the significant risks that remain in the banking sector. In an annual report about Cyprus, Moody’s underlined the high level of non-performing loans in the country’s banking system.

Cyprus remains three upgrades away from Moody’s investment grade since last July when the rating agency upgraded the Cypriot economy by one notch, to Ba3 from B1, maintaining a positive outlook.

According to Moody’s Cyprus is highly susceptible to event risk, reflecting the significant risks that remain in the banking sector. The main rated Cypriot banks have very low stand-alone ratings and the banking sector remains large. However, the stability of the countrys financial sector and bank balance sheets has been bolstered through increased capital buffers, the sale of non-core activities overseas and improvements in bank funding profiles the rating agency noted.

Nevertheless, it said, uncertainties remain over the strength of the banking sector, given the very high NPL ratios across both household and corporate loan books.

Cypruss (Ba3 positive) credit profile reflects recent improvements in the countrys economic resilience, robust growth momentum and strong fiscal performance, Moodys Investors Service said in a new annual report. It added that Cyprus faces credit challenges arising from its small and relatively undiversified economy, as well as high levels of government, banking and household debt.

Moodys has raised its real GDP growth forecast for 2017 to 3.5% (from 2.7%), and for 2018 to 3.2% (from 2.5%), and expects a gradual moderation in growth.

It said that although it expects household private debt servicing to result in a deceleration in the growth of private consumption, it is still likely to be the main driver of the ongoing expansion, supported by favourable developments in the labour market and the important tourism sector.

After the strong fiscal consolidation efforts realised in recent years, the governments 2017-19 Medium Term Fiscal Plan assumes a broadly neutral fiscal stance, with a slight deterioration in the general government budget balance pencilled in for 2018 Moody’s noted.

The rating agency projects a headline deficit of just 0.4% of GDP for 2017 and primary surpluses of around 2.1% of GDP through 2018, which will help support debt reduction.

In Moodys central scenario, public debt will decline to around 92% of GDP by 2019. However, it said that Cypruss debt metrics still remain vulnerable to a negative growth, fiscal or a combined shock scenario.

The positive outlook on Cypruss sovereign rating reflects Moodys view that improvements in economic resilience and fiscal strength are likely to be sustained.

Source: Cyprus News Agency