24/10/2016 09:24
Fitch Ratings has upgraded Cyprus`s Long-term foreign and local currency Issue Default Ratings (IDRs) by one notch to BB- from B+, it announced on Friday.
“The issue ratings on Cyprus`s senior unsecured foreign and local-currency bonds have also been upgraded to BB- from B+. The Outlooks on the long-term IDRs are Positive. The Country Ceiling has been upgraded to BBB- from BB+ and the short-term foreign and local currency IDRs have been affirmed at B,” it says in a press release.
According to the ratings agency “Cyprus is continuing to make strong progress in its adjustment following the 2013 banking crisis.”
“Its exit from the EU and IMF programme in March took place in a context of outperformance of fiscal and economic programme targets, success at lifting capital controls, and steps taken to restructure the banking sector,” it adds.
“The economic recovery, now into its second year, is supporting employment, bank asset quality adjustment, and public finances,” it points out.
Fitch is projecting “GDP growth of 2.9% in 2016 (from 1.9% projected a year earlier). It refers to the positive results of tourism and the drop recorded in unemployment.
“For 2017-2018, GDP growth of around 2.5% will benefit from an expected increase in foreign direct investment” it says.
“Downside risks to the outlook stem from banking sector deleveraging and the weak external environment,” it warns.
Referring to the banking sector it notes that it “is gradually strengthening, evident in the pick-up in deposits and stable capitalization.”
“Deleveraging is ongoing, with overall sector assets down to 3.7x GDP in June 2016 from almost 6x in 2009,” it says.
It adds that “the property sector remains illiquid but prices seem to be stabilizing at around 30% below their 2008 peak.”
“Strengthened supervision, management and regulations are helping to slowly reduce the exceptionally large stock of non-performing exposures (NPEs) at 48% of total loans,” Fitch says also pointing out that the new foreclosure framework is in the initial phases of implementation.
According to the ratings agency “a strong track record of fiscal policy management provides confidence that authorities will remain committed to government debt reduction in line with fiscal targets.”
Fitch projects “government debt to decline to just over 100% of GDP by 2018 (still more than twice the projected `BB` peer median) from a peak of 108.9% in 2015.”
It also judges the impact of Brexit on Cyprus, “which is most directly exposed to the UK through tourism (39% share of arrivals), to be moderated by positive developments in the sector including diversification into other markets and the extension of the tourism season.”
Advance bookings from the UK suggest no slowdown for 2017, it adds.
In its debt sensitivity analysis, the ratings agency explains that it “assumes a primary surplus averaging 2% of GDP, trend real GDP growth averaging 2%, an average effective interest rate of 3.4% and GDP deflator inflation of 1.2%.”
“On the basis of these assumptions, the debt-to-GDP ratio would have peaked at almost 109% in 2015, and will edge down slowly to around 90% by 2025,” it says.
Gross debt-reducing operations such as future privatisations are not considered in the Fitch debt dynamics.
“Our projections also do not include the impact on growth of potential future gas reserves off the southern shores of Cyprus, the benefits from which are several years into the future, although now less speculative,” it adds.
FinMin expresses satisfaction
Finance Minister Harris Georgiades has expressed his satisfaction over the upgrade the Cypriot economy received from ratings agency Fitch but has warned against complacency.
“Upgrades satisfy us but should under no circumstances lead us to complacency,” Georgiades wrote in his account on twitter.
“The issue ratings on Cyprus`s senior unsecured foreign and local-currency bonds have also been upgraded to BB- from B+. The Outlooks on the long-term IDRs are Positive. The Country Ceiling has been upgraded to BBB- from BB+ and the short-term foreign and local currency IDRs have been affirmed at B,” it says in a press release.
According to the ratings agency “Cyprus is continuing to make strong progress in its adjustment following the 2013 banking crisis.”
“Its exit from the EU and IMF programme in March took place in a context of outperformance of fiscal and economic programme targets, success at lifting capital controls, and steps taken to restructure the banking sector,” it adds.
“The economic recovery, now into its second year, is supporting employment, bank asset quality adjustment, and public finances,” it points out.
Fitch is projecting “GDP growth of 2.9% in 2016 (from 1.9% projected a year earlier). It refers to the positive results of tourism and the drop recorded in unemployment.
“For 2017-2018, GDP growth of around 2.5% will benefit from an expected increase in foreign direct investment” it says.
“Downside risks to the outlook stem from banking sector deleveraging and the weak external environment,” it warns.
Referring to the banking sector it notes that it “is gradually strengthening, evident in the pick-up in deposits and stable capitalization.”
“Deleveraging is ongoing, with overall sector assets down to 3.7x GDP in June 2016 from almost 6x in 2009,” it says.
It adds that “the property sector remains illiquid but prices seem to be stabilizing at around 30% below their 2008 peak.”
“Strengthened supervision, management and regulations are helping to slowly reduce the exceptionally large stock of non-performing exposures (NPEs) at 48% of total loans,” Fitch says also pointing out that the new foreclosure framework is in the initial phases of implementation.
According to the ratings agency “a strong track record of fiscal policy management provides confidence that authorities will remain committed to government debt reduction in line with fiscal targets.”
Fitch projects “government debt to decline to just over 100% of GDP by 2018 (still more than twice the projected `BB` peer median) from a peak of 108.9% in 2015.”
It also judges the impact of Brexit on Cyprus, “which is most directly exposed to the UK through tourism (39% share of arrivals), to be moderated by positive developments in the sector including diversification into other markets and the extension of the tourism season.”
Advance bookings from the UK suggest no slowdown for 2017, it adds.
In its debt sensitivity analysis, the ratings agency explains that it “assumes a primary surplus averaging 2% of GDP, trend real GDP growth averaging 2%, an average effective interest rate of 3.4% and GDP deflator inflation of 1.2%.”
“On the basis of these assumptions, the debt-to-GDP ratio would have peaked at almost 109% in 2015, and will edge down slowly to around 90% by 2025,” it says.
Gross debt-reducing operations such as future privatisations are not considered in the Fitch debt dynamics.
“Our projections also do not include the impact on growth of potential future gas reserves off the southern shores of Cyprus, the benefits from which are several years into the future, although now less speculative,” it adds.
FinMin expresses satisfaction
Finance Minister Harris Georgiades has expressed his satisfaction over the upgrade the Cypriot economy received from ratings agency Fitch but has warned against complacency.
“Upgrades satisfy us but should under no circumstances lead us to complacency,” Georgiades wrote in his account on twitter.
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