Standard and Poor’s revises Cyprus’ economic outlook to positive

Standard and Poor`s rating agency affirmed Friday the rating of Cyprus economy at BB + / B while revising the outlook on its long-term sovereign credit rating to positive from stable.

According to S and P the positive outlook reflects that the agency could raise the ratings on Cyprus over the next 12 months if budgetary consolidation continues unabated, and the economy continues to recover toward pre-crisis output levels.

The Agency projects that GDP growth will average 3% between 2017 and 2020, as investments and employment recover, and services exports continue to perform well. This is higher than its previous expectation of 2.5% over the same period, and well above the forecast euro area average of 1.7%. It also projects that growth tailwinds will facilitate banks` bad loan restructuring.

Last March # S and P`s upgraded Cyprus` rating foreign and local currency long- and short-term sovereign credit ratings to BB + / B with a stable outlook.

The Agency keeps Cyprus just one notch below the investment grade, unlike Fitch and Moody`s, that keep Cyprus three grades below the investment grade. S and P was the first house to downgrade Cyprus economy to junk in January 2012.

Furthermore, the agency expects Cyprus’ budgetary position to remain in surplus over the forecast horizon, without factoring in any further discretionary measures.

“Even if there were some fiscal slippage in the run-up to the 2018 presidential election, we would expect public finances to subsequently consolidate, leading to a decline in general government debt”, says S and P.

The Agency could consider raising the ratings on the Republic of Cyprus over the next 12 months if Cyprus` economy continues to recover toward pre-crisis levels, while fiscal policy remains broadly stable, putting government debt-to-GDP on a downward path, or Cyprus` credit and monetary conditions continue to converge with those of the eurozone, via a material reduction in Cyprus` unusually high nonperforming exposures (NPEs) amid further reductions in interest rate differentials.

However, it could revise the outlook back to stable if economic growth is significantly lower than it currently expects or if a shift in the fiscal stance leads S and P to believe that general government debt-to-GDP is no longer on a declining trajectory over the forecast horizon.

It is noted that the ratings on Cyprus are constrained by the economy`s high degree of leverage–evident in both public and private sector balance sheets–and its impaired banking system. The ratings are supported by Cyprus’ income levels, with GDP per capita among the highest in the `BB` category, and the ongoing economic recovery that it is anticipated that will allow for a gradual reduction in general government and private sector debt, while also supporting the

financial sector`s efforts toward normalization.

S and P forecasts that the economy will grow by 3% over 2017-2020, supported by investment activity and services exports.

It also expects the impact of Brexit on Cyprus to be limited.

Through 2020 it anticipates that consumption growth will decelerate as household debt servicing picks up momentum, even though it projects the unemployment rate to decrease further and disposable incomes to rise. Investment activity is likely to remain strong, supported across the forecast horizon by ongoing projects, particularly in the tourism and energy sectors, with the latter including the exploration of offshore natural gas.

It also expects exports, particularly from tourism and business services, to continue to make an important contribution to growth.

It is anticipated that the thrust of the authorities` macroeconomic policy over the forecast horizon will be on maintaining public finances close to balance, while pursuing debt reduction and aiding the recovery of the banking sector.

It is expected that government debt will decline in absolute terms over the forecast horizon on the back of small recurrent general government surpluses.

The underlying current account deficit is likely to widen slightly through 2020 reflecting greater demand for imported goods and services as project activity picks up.

NPEs are likely to reduce gradually over time supported by various efforts to unblock banks` balance sheets.

The agency expects imports of aircrafts to further widen the external deficit in 2017. It also expects the underlying deficit to widen toward 2% of GDP in 2020 from 1.2% in 2018 driven by rising imports, in turn resulting from robust domestic demand, and we expect it to be financed by direct investment inflows.

Source: Cyprus News Agency

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