28/07/2016 07:26
Cyprus' first market issuance last week is a key milestone following its exit from the EU and IMF bailout programme in March, says Fitch Ratings.
“We had already highlighted that demonstrating fiscal financing flexibility through a sustained track record of market access at affordable rates is one of several factors that could lead to an upgrade of the sovereign rating of 'B+' with a Positive Outlook”, the agency says in a statement.
The seven-year 3.75% €1 bn bond was priced at the lowest coupon rate achieved by Cyprus for a euro benchmark bond and was realised without support from the European Central Bank's bond-buying scheme.
According to the Fitch Ratings, other developments that could lead to an upgrade of the sovereign rating include further stabilisation in the banking sector, a track record of economic recovery and reduction in private sector indebtedness, narrowing of the current account deficit, and continued fiscal adjustment.
At close to 109% of GDP in 2015, gross general government debt (GGGD) is more than 2x the 'B' rating category median, reducing Cyprus' fiscal scope to absorb domestic or external shocks. Banking sector assets are 4x GDP and the sector's exceptionally weak asset quality undermines economic stability and growth. The weak external position implies that further economic rebalancing may be needed over the medium term.
Economic recovery is under way, supported by improving household consumption in line with a fall in unemployment, and strong tourist inflows. But the UK's recent vote to leave the EU presents a downside risk to Cyprus' growth outlook, mainly because it could affect trade, largely tourism related. Total exports to the UK represent close to 10% of GDP. A prolonged depreciation of sterling would weaken UK purchasing power and potentially dampen growth in the tourism sector.
Fiscal policy management has been strong and the government has overachieved on its targets.
“We project budget surpluses of 0.2% of GDP in 2016 and 1% for 2017, reflecting a neutral fiscal stance supported by economic recovery. We project GGGD to fall below 100% of GDP by 2017. Debt-management operations and cash buffers reduce refinancing risks”, the agency concludes.
“We had already highlighted that demonstrating fiscal financing flexibility through a sustained track record of market access at affordable rates is one of several factors that could lead to an upgrade of the sovereign rating of 'B+' with a Positive Outlook”, the agency says in a statement.
The seven-year 3.75% €1 bn bond was priced at the lowest coupon rate achieved by Cyprus for a euro benchmark bond and was realised without support from the European Central Bank's bond-buying scheme.
According to the Fitch Ratings, other developments that could lead to an upgrade of the sovereign rating include further stabilisation in the banking sector, a track record of economic recovery and reduction in private sector indebtedness, narrowing of the current account deficit, and continued fiscal adjustment.
At close to 109% of GDP in 2015, gross general government debt (GGGD) is more than 2x the 'B' rating category median, reducing Cyprus' fiscal scope to absorb domestic or external shocks. Banking sector assets are 4x GDP and the sector's exceptionally weak asset quality undermines economic stability and growth. The weak external position implies that further economic rebalancing may be needed over the medium term.
Economic recovery is under way, supported by improving household consumption in line with a fall in unemployment, and strong tourist inflows. But the UK's recent vote to leave the EU presents a downside risk to Cyprus' growth outlook, mainly because it could affect trade, largely tourism related. Total exports to the UK represent close to 10% of GDP. A prolonged depreciation of sterling would weaken UK purchasing power and potentially dampen growth in the tourism sector.
Fiscal policy management has been strong and the government has overachieved on its targets.
“We project budget surpluses of 0.2% of GDP in 2016 and 1% for 2017, reflecting a neutral fiscal stance supported by economic recovery. We project GGGD to fall below 100% of GDP by 2017. Debt-management operations and cash buffers reduce refinancing risks”, the agency concludes.
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