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Scope affirmed the Republic of Cyprus' credit ratings at BBB-

27/06/2022 09:01

Scope Ratings affirmed on Friday the Republic of Cyprus’s BBB- long-term issuer and senior unsecured local- and foreign-currency ratings and revised the outlook from stable to positive.
According to Scope’s report, the decision to revise the outlook reflects the country’s solid growth prospects, supported by long-term improvements in labour market conditions, foreign-financed investment in important sectors as well as structural reform.

The agency also refers to the robust fiscal trajectory, underpinned by Cyprus’s good consolidation record, renewed commitment to fiscal discipline and strong growth outlook. Thirdly, Score names the continued strengthening of the banking sector through significant progress in reducing non-performing exposures as another reason for its decision.

Scope says that the Cypriot economy rebounded strongly following the relaxation of containment measures for COVID-19. Real GDP reached its pre-crisis levels as early as Q3 2021 and grew by 5.5% in 2021, well above the government’s 2021-24 Stability Programme forecast of 3.6%, while unemployment has dropped to 5.4% in April 2022, the lowest level since 2009.

The country is facing headwinds in the form of persisting COVID-19 infections and the economic knock-on effects of the war in Ukraine, including rising inflation and the associated tightening of monetary policies globally, the agency says. Cyprus, it goes on, is reliant on trade with Russia as exports to the country represent 8.4% of GDP, mostly through tourism – as Russia accounted for around 20% of tourism arrivals in 2019 - and professional services. The short-term economic outlook for Cyprus has thus weakened somewhat but Scope says it expects the country to continue its robust recovery with 2% growth in 2022 followed by 2.7% on average over 2023-26.

Recently, Scope notes, the government announced a series of financial support measures totalling € 300 mln (1.2% of GDP) to offset the impact of the war in Ukraine and the associated inflationary pressures for households. As such, Scope’s baseline projections see the budget deficit remaining broadly unchanged at around 2% of GDP in 2022. Thereafter, the budget balance should improve steadily and reach a surplus of 1% of GDP by 2027. “This view is underpinned by the government’s good record of fiscal discipline” the agency says.

Scope expects Cyprus’s public debt to return to pre-pandemic levels by 2024 and reach 75% of GDP by 2027, “one of the strongest reductions among EU countries.”

It says finally that the non-performing exposures (NPE) ratio continued to improve in the wake of the COVID-19 pandemic even after the withdrawal of emergency support measures. The NPE ratio reached 11% in December 2021, down from 27% in March 2020 and from the 2014 peak of 49%, the agency notes.