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DBRS upgraded trend for Cypriot economy to positive

18/11/2019 10:24

Rating agency DBRS has changed the trend for the Cypriot economy to positive from stable while maintaining its Cyprus’s Long-Term Foreign and Local Currency – Issuer Ratings at BBB (low), citing the improved sovereign debt trajectory, driven by sustained robust economic growth, large primary surpluses and early debt repayments.
“The positive trend reflects DBRS Morningstar’s view that the outlook for the downward trajectory in the public debt ratio has improved, driven by sustained robust economic growth, large primary surpluses and early debt repayments,” the Canadian rating agency said in a press release.
The Cypriot economy, the agency added, while moderating, is projected at around 3% in 2019 and 2020, among the strongest in the Euro area.
DBRS said Cyprus’s fiscal position has also continued to improve, with the fiscal surplus reaching sizable levels, and the government is planning to repay the IMF loan in advance next year.
It adds however that the materialisation of fiscal risks could delay the reduction in public debt, but strong growth, together with large fiscal surpluses and early debt repayments, is still expected to contribute to the decline in the government debt-to-GDP ratio over the coming years.
The agency said that the Cyprus long-term rating currently at BBB (low) could be raised if healthy economic growth is sustained and the fiscal position remains sound, contributing to the downward trajectory in the public debt ratio, further progress in substantially reducing banks’ NPEs and private sector debt, and the strengthening of the banking sector would also be positive for the ratings.
However, the positive trend could be changed back to Stable if growth weakens significantly and the fiscal position worsens substantially, while a reversal of the downward trajectory in NPEs could also be negative for the ratings, the agency added.
On Cyprus public debt, DBRS said after a large increase in 2018, due to the support of the sale of the Cyprus Cooperative Bank (CCB) to Hellenic Bank, the debt-to-GDP ratio is expected to decline at a relatively rapid pace over the next years.
The debt-to-GDP ratio is projected at 95.6% in 2019, according to the latest government forecasts, down from 100.6% in 2018, while by 2021, IMF and European Commission projections point to a debt ratio well below 90%, driven by strong economic growth, large primary surpluses of around 5% of GDP, and early debt repayments.
DBRS also said that after the early repayment of the Russian loan, Cyprus is looking to fully repay the IMF loan in advance in 2020.
“Although debt dynamics are vulnerable to adverse shocks, particularly a materialisation of contingent liabilities, public debt management is prudent,” DBRS added.
The agency also noted that the sound fiscal position is expected to be maintained, contributing to the reduction of debt.
Following the one-off negative effect related to the sale of CCB in 2018, which shifted the fiscal surplus into deficit, the government is targeting a surplus of 3.8% in 2019 and 2.7% in 2020, supported by strong revenues and contained expenditure, DBRS noted.
According to DBRS, risks to the fiscal outlook include the pending Supreme Court ruling on the public sector wage cuts during the crisis and risks associated to the financial sector as well as the Asset Protection Scheme (APS) guaranteed by the state provide to Hellenic Bank as part of the CCB sale.

The government estimates that potential unexpected losses will not to exceed EUR 155 million (equivalent to 0.7% of GDP) over 12 years. Any calls on the APS guarantees would be covered by the state’s Asset Management Company without drawing on the budget, DBRS added.
On the banking sector, DBRS said that high non-performing exposures (NPEs) “remain the main risk to financial stability in Cyprus,” weighing on DBRS’ assessment of the Monetary Policy and Financial Stability building block.
The NPEs in the Cypriot banking system declined materially in 2018, mainly driven by the resolution of the CCB, effectively removing €5.8 billion of NPEs from the Cypriot banking system and to a state-owned AMC.
The agency added however in 201 NPE reduction has been limited with a 1% reduction in the period of January to May 2019 with mainly organic reductions. It also added the government scheme ESTIA aiming to assist non-performing mortgage borrowers to repay their loans is expected to address “well below the up to €3.4 billion of NPEs initially estimated by the government.”
DBRS expects further progress in NPE reduction to be largely driven by the banks’ efforts, including NPE portfolio sales. The Cypriot banks, DBRS added, “remain profitable and their capital levels and loss loan provisioning have been raised to adequate levels and above the European average.”
Furthermore, DBRS noted that NPE reduction is supported by the falling unemployment, rising house prices, and solid economic growth.
Concluding, the Canadian agency said Cyprus benefits from a stable political environment and sound institutions with the government committed to addressing the country’s challenges.
It added, however, that the government lacks a majority in the House of Representatives (HoR) and this has resulted in delays in adopting pending reforms, including those of the public administration and the local governments.