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Fitch: Cyprus does not need QE

16/03/2016 06:52
Fitch Ratings send a positive signal for the credit rating of Cyprus, five weeks before the conclusion of its review, noting in a statement that the country does not need ECB’s quantitative easing program to tap international markets.

According to Fitch, Cyprus's decision to exit its three-year EU-IMF programme ahead of schedule without a precautionary post-programme credit line reflects the sovereign's comfortable cash position and strong debt management, which limit refinancing risks.

In a note released on Tuesday night, Fitch notes that the government concluded the macroeconomic adjustment programme on 7 March, two months ahead of the scheduled IMF, and a few weeks ahead of the EU expirations. Having completed the penultimate review in January, Cyprus used only EUR7.3bn of the total EUR10bn available to it since the programme was mandated in 2013.

The government's cash buffer, at over EUR1bn as of end-January 2016, will cover the country's financing needs of around EUR1bn for 2016. Debt-management operations aimed at extending maturities further reduce refinancing risks during this post-programme period. In November 2015 Cyprus raised EUR1bn on the international capital markets and used around half of the proceeds to buy back existing debt. The government has stated its intention to issue again this year, partly to pre-finance the next peak in redemptions in 2019.

While confidence has been shored up by the ECB's bond buying scheme, Fitch expects that Cyprus does not need QE support to tap markets following its exclusion from the scheme. According to ECB rules, which exclude non-investment-grade rated borrowers from the ECB's QE purchases unless a bailout programme-related waiver is in place, Cyprus is no longer eligible for QE support. ECB cumulative holdings of Cypriot bonds, at EUR285mn, represent less than 5% of total Cypriot market debt outstanding, and around 14% of long-term market debt issued in 2015.

The economic recovery in Cyprus is underway. GDP grew by 1.6% in 2015, following a decline of 2.5% in 2014. Growth was supported by lower oil prices, improving sentiment, and the euro depreciation, with recoveries seen across sectors including tourism. Risks include a weak, albeit improving, housing market and a credit-impeding public and corporate debt overhang that could take years to unwind.

Progress in banking sector reform has been made, but implementation is dependent on the political will to confront debtors, which could wane in the run-up to parliamentary elections in May. The foreclosure law, passed in 2015 along with a new insolvency framework, lies at the heart of efforts to reduce the banking sector's exceptionally high stock of non-performing exposures. Deposits have been broadly stable since restrictions on capital flows were removed in April 2015.

On the fiscal front, Cyprus delivered a general government deficit of 0.5% of GDP (against 1% estimated by Fitch) for 2015, and is projected by Fitch to generate budget surpluses of around 0.2% and 1% of GDP for 2016 and 2017, respectively. Public debt peaked at just below 109% of GDP in 2015, and is projected by Fitch to decline to around 100% by 2017. At more than double the 'B' median of 43% for 2015, Cyprus's high public debt reduces its ability to absorb domestic or external shocks.

Fitch upgraded Cyprus's Long-Term Foreign- and Local-Currency IDRs to 'B+' in October 2015. The Outlooks on the ratings are Positive. The next rating review is scheduled for 22 April.