26/05/2009 15:31
In its report released today, the international credit rating firm Fitch said that the banking supervision is conservative and that the Cypriot banks are exposed to external borrowing. The report confirmed the ratings and maintained the prospects, since economy continues to grow despite the global crisis, the balance has a surplus and the government reformed the pension system.
The agency also affirmed the local currency IDR at 'AA-' with a Stable Outlook and the Country Ceiling at 'AAA' which is the common ceiling for euro area members and the long-term foreign currency Issuer Default rating (IDR) at 'AA-' with a Stable Outlook and Short-term foreign currency rating at 'F1+'.
'The Republic of Cyprus is now in its second year of euro-area membership, public finances are on an even keel and long overdue legislation to reform the state pension system promises to enhance their long term sustainability' said Chris Pryce, a Director in Fitch's Sovereign team.
'Euro area membership has brought many benefits, including the elimination of transfer and convertibility risk. Nonetheless, a large and growing current account deficit which reflects deteriorating international competitiveness and rising commodity prices, remains a cause for concern.", he said.
According to Fitch, Cypriot GDP has grown rapidly, averaging almost 4% per annum over the past decade, approximately double the EU average and well above the 'AA' median, bringing GDP per head up to 93% of the EU27 average.
“Inevitably the global recession will cause a slowdown but growth is still possible this year, in contrast to most other EU members. However, much will depend on tourism, residential construction (much of which is linked with tourism and has been in decline since mid-2008) and (non-banking) financial and business services. There is little domestic manufacturing. The first quarter's growth in 2009 was encouraging: GDP rose on a seasonally adjusted basis by 1.6% at an annual rate. Most other EU members recorded a decline in this quarter. For the year as a whole, tourism will be crucial and here the indications are less buoyant: visitor numbers fell in the first four months by almost 9% while revenue from tourism fell almost 13% in the first quarter. The summer season will be critical for overall growth in 2009”, the report noted.
“Public finances are broadly supportive of the rating. However, a two-year period of fiscal surpluses, the first since 1971, during the fiscal consolidation drive over the past four years to qualify for euro area membership, is likely to end in 2009. The balance will now sink back into deficit, although the government believes it will be a relatively small one, which could be consistent with a further fall in the debt ratio this year. This has already declined to 49.1% of GDP at end-2008 from 70.3% in 2004, a significant achievement, as is the recent passage of pension reform through parliament”, it added.
“The domestic loan/deposit ratio is a comfortable 90%. Foreign-currency deposits, a lot of which have come in recent months from Russia, are subject to a minimum liquid asset requirement of 70%. Bank regulation is conservative. Nonetheless, Cypriot banks are relatively weak by western European standards: net external indebtedness has risen sharply in recent years and it is not known how far domestic non-performing loans will increase”, Fitch supports.
“The political hopes associated with the election last year of moderate Greek Cypriot president, Demetris Christofias, in place of a hard-line opponent of a negotiated settlement, have suffered a setback, following the recent victory of a 'hard-line' party in parliamentary elections in the Turkish sector and a contentious European Court of Justice (ECJ) ruling. Direct negotiations between the Greek and Turkish Cypriots started last year and are continuing. A conclusion may be forthcoming around the end of the year. An agreement could enhance both economic prospects and the republic's credit standing over time”, it concluded.
The agency also affirmed the local currency IDR at 'AA-' with a Stable Outlook and the Country Ceiling at 'AAA' which is the common ceiling for euro area members and the long-term foreign currency Issuer Default rating (IDR) at 'AA-' with a Stable Outlook and Short-term foreign currency rating at 'F1+'.
'The Republic of Cyprus is now in its second year of euro-area membership, public finances are on an even keel and long overdue legislation to reform the state pension system promises to enhance their long term sustainability' said Chris Pryce, a Director in Fitch's Sovereign team.
'Euro area membership has brought many benefits, including the elimination of transfer and convertibility risk. Nonetheless, a large and growing current account deficit which reflects deteriorating international competitiveness and rising commodity prices, remains a cause for concern.", he said.
According to Fitch, Cypriot GDP has grown rapidly, averaging almost 4% per annum over the past decade, approximately double the EU average and well above the 'AA' median, bringing GDP per head up to 93% of the EU27 average.
“Inevitably the global recession will cause a slowdown but growth is still possible this year, in contrast to most other EU members. However, much will depend on tourism, residential construction (much of which is linked with tourism and has been in decline since mid-2008) and (non-banking) financial and business services. There is little domestic manufacturing. The first quarter's growth in 2009 was encouraging: GDP rose on a seasonally adjusted basis by 1.6% at an annual rate. Most other EU members recorded a decline in this quarter. For the year as a whole, tourism will be crucial and here the indications are less buoyant: visitor numbers fell in the first four months by almost 9% while revenue from tourism fell almost 13% in the first quarter. The summer season will be critical for overall growth in 2009”, the report noted.
“Public finances are broadly supportive of the rating. However, a two-year period of fiscal surpluses, the first since 1971, during the fiscal consolidation drive over the past four years to qualify for euro area membership, is likely to end in 2009. The balance will now sink back into deficit, although the government believes it will be a relatively small one, which could be consistent with a further fall in the debt ratio this year. This has already declined to 49.1% of GDP at end-2008 from 70.3% in 2004, a significant achievement, as is the recent passage of pension reform through parliament”, it added.
“The domestic loan/deposit ratio is a comfortable 90%. Foreign-currency deposits, a lot of which have come in recent months from Russia, are subject to a minimum liquid asset requirement of 70%. Bank regulation is conservative. Nonetheless, Cypriot banks are relatively weak by western European standards: net external indebtedness has risen sharply in recent years and it is not known how far domestic non-performing loans will increase”, Fitch supports.
“The political hopes associated with the election last year of moderate Greek Cypriot president, Demetris Christofias, in place of a hard-line opponent of a negotiated settlement, have suffered a setback, following the recent victory of a 'hard-line' party in parliamentary elections in the Turkish sector and a contentious European Court of Justice (ECJ) ruling. Direct negotiations between the Greek and Turkish Cypriots started last year and are continuing. A conclusion may be forthcoming around the end of the year. An agreement could enhance both economic prospects and the republic's credit standing over time”, it concluded.
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