20/03/2017 09:43
Standard & Poor`s upgraded its assessment of Cyprus on Friday to `BB+` from `BB`, with a stable outlook.
At the same time, it affirmed its `B` foreign and local currency short-term sovereign credit ratings.
S&P said that it expected the Cypriot economy will expand by about 2.7% this year and maintain average annual growth at just under 2.5% between 2018-2020.
“We think that the sovereign`s budgetary position will on average show a small surplus over 2018-2020, driving a discernible decline in government debt” it said.
“We are therefore raising our long-term sovereign credit ratings on Cyprus to `BB+` from `BB` and affirming our `B` short-term rating. The stable outlook balances our view of Cyprus` fiscal and economic progress against unusually high levels of nonperforming loans in its financial sector, alongside risks of weaker reform delivery ahead of next year`s presidential elections” the rating agency noted.
It explained that the upgrade reflected its views of Cyprus` stronger-than-expected economic growth and fiscal progress. “Under our projections, general government debt will continue to decline even as the private sector deleverages. We estimate that net general government debt will drop to below 90% of GDP by the end of 2018 versus slightly under 100% of GDP at end-2015” it said.
S&P estimates that after expanding 2.8% last year, Cyprus` economy will continue to post solid GDP growth of between 2.0% and 3.0% over its forecast horizon and that the unemployment rate, 13.3% at year-end 2016, will fall below 12.0% by 2018.
In the light of Cyprus` strong economic performance and previous budgetary consolidation efforts, the rating agency estimates the government`s budgetary position to have ended in a small surplus (0.1% of GDP) in 2016, outperforming its own target by 0.4 percentage points.
“Instead, we anticipate the government`s budgetary position will continue strengthening thanks to a gradual reduction in unemployment benefits and an increase in cyclical revenue items amid the economic recovery. The upcoming 2018 elections could, in our view, prompt a loosening of the fiscal stance toward the end of 2017. Still, we do not expect any pronounced negative deviation from the budget balance and see a rise of the budget surplus over the forecast horizon” S&P said.
It noted that the stable outlook balances its view of the upside rating potential due to improvement in economic and budgetary performance and reduction of currently high levels of NPLs against the risk of weaker growth, risks to banking sector stability and budgetary policy deviation.
Government commitment to a balanced budget policy
Friday's upgrade by Standard and Poor`s confirms the Cypriot economy`s growth prospects as well as the stable and sustainable fiscal path, Minister of Finance Harris Georgiades has told CNA, reaffirming the government`s commitment to a balanced budget policy.
One year after Cyprus` exit from an economic adjustment programme funded by the EU and the IMF, S&Ps upgraded on Friday Cyprus long-term credit rating to BB+ from BB in its second consecutive upgrade since last September. After Friday's rating action, Cyprus is only on notch away from the investment grade category.
“This upgrade constitutes a very credible confirmation of the Cypriot economy`s growth prospects as well as a confirmation of the stable and sustainable course of the public finances as well,” Georgiades told CNA.
He highlighted the agency`s projection that a balanced budget, which constitutes the government`s basic target, as well as the very satisfactory growth rate will continue in the medium term.
Georgiades also highlighted that fact that this upgrade comes one year after Cyprus exit from the financial assistance package.
“This precisely confirms that no fiscal relaxation or growth slack took place in the last year but in fact these were maintained and strengthened,” he said.
Asked on the agency`s projection that fiscal relaxation towards the end of the year due to the presidential elections in early-2018, Georgiades said S&P believes that “despite this theoretical risk, Cyprus will continue running on balanced budget.”
He recalled that in this context the government has taken actions such as the indefinite freeze in hiring in the public sector, as well as agreement with the civil servants trade union for no salary increments for the period of 2017 and 2018.
These are moves that confirm the government`s commitment and concern not to repeat bad practises of the past, that accelerated in election period,” he said, adding “we will absolutely avoid this.”
Furthermore, Georgiades pointed out that Cyprus should heed the remarks by the agency both concerning future upgrades as well as the issues that would retract Cyprus` upgrading track record.
“In this context we should all realise that big delays in approving reform proposals or even worse, rejecting reforms entails cost both to the country and to the economy,” he said, adding “obstructing the reform agenda hurts the country and not the government.”
The Finance Minister said the government will shortly table new proposals for the civil service reform and for attracting a private investor in the island`s Telecommunication company (Cyta), proposals rejected by the parliament.
He said the government will incorporate positions and concerns by the parliamentary majority in a bid to maintain the reform momentum because this the expectation shared by the international investment community as usually reflected by the rating agencies.
At the same time, it affirmed its `B` foreign and local currency short-term sovereign credit ratings.
S&P said that it expected the Cypriot economy will expand by about 2.7% this year and maintain average annual growth at just under 2.5% between 2018-2020.
“We think that the sovereign`s budgetary position will on average show a small surplus over 2018-2020, driving a discernible decline in government debt” it said.
“We are therefore raising our long-term sovereign credit ratings on Cyprus to `BB+` from `BB` and affirming our `B` short-term rating. The stable outlook balances our view of Cyprus` fiscal and economic progress against unusually high levels of nonperforming loans in its financial sector, alongside risks of weaker reform delivery ahead of next year`s presidential elections” the rating agency noted.
It explained that the upgrade reflected its views of Cyprus` stronger-than-expected economic growth and fiscal progress. “Under our projections, general government debt will continue to decline even as the private sector deleverages. We estimate that net general government debt will drop to below 90% of GDP by the end of 2018 versus slightly under 100% of GDP at end-2015” it said.
S&P estimates that after expanding 2.8% last year, Cyprus` economy will continue to post solid GDP growth of between 2.0% and 3.0% over its forecast horizon and that the unemployment rate, 13.3% at year-end 2016, will fall below 12.0% by 2018.
In the light of Cyprus` strong economic performance and previous budgetary consolidation efforts, the rating agency estimates the government`s budgetary position to have ended in a small surplus (0.1% of GDP) in 2016, outperforming its own target by 0.4 percentage points.
“Instead, we anticipate the government`s budgetary position will continue strengthening thanks to a gradual reduction in unemployment benefits and an increase in cyclical revenue items amid the economic recovery. The upcoming 2018 elections could, in our view, prompt a loosening of the fiscal stance toward the end of 2017. Still, we do not expect any pronounced negative deviation from the budget balance and see a rise of the budget surplus over the forecast horizon” S&P said.
It noted that the stable outlook balances its view of the upside rating potential due to improvement in economic and budgetary performance and reduction of currently high levels of NPLs against the risk of weaker growth, risks to banking sector stability and budgetary policy deviation.
Government commitment to a balanced budget policy
Friday's upgrade by Standard and Poor`s confirms the Cypriot economy`s growth prospects as well as the stable and sustainable fiscal path, Minister of Finance Harris Georgiades has told CNA, reaffirming the government`s commitment to a balanced budget policy.
One year after Cyprus` exit from an economic adjustment programme funded by the EU and the IMF, S&Ps upgraded on Friday Cyprus long-term credit rating to BB+ from BB in its second consecutive upgrade since last September. After Friday's rating action, Cyprus is only on notch away from the investment grade category.
“This upgrade constitutes a very credible confirmation of the Cypriot economy`s growth prospects as well as a confirmation of the stable and sustainable course of the public finances as well,” Georgiades told CNA.
He highlighted the agency`s projection that a balanced budget, which constitutes the government`s basic target, as well as the very satisfactory growth rate will continue in the medium term.
Georgiades also highlighted that fact that this upgrade comes one year after Cyprus exit from the financial assistance package.
“This precisely confirms that no fiscal relaxation or growth slack took place in the last year but in fact these were maintained and strengthened,” he said.
Asked on the agency`s projection that fiscal relaxation towards the end of the year due to the presidential elections in early-2018, Georgiades said S&P believes that “despite this theoretical risk, Cyprus will continue running on balanced budget.”
He recalled that in this context the government has taken actions such as the indefinite freeze in hiring in the public sector, as well as agreement with the civil servants trade union for no salary increments for the period of 2017 and 2018.
These are moves that confirm the government`s commitment and concern not to repeat bad practises of the past, that accelerated in election period,” he said, adding “we will absolutely avoid this.”
Furthermore, Georgiades pointed out that Cyprus should heed the remarks by the agency both concerning future upgrades as well as the issues that would retract Cyprus` upgrading track record.
“In this context we should all realise that big delays in approving reform proposals or even worse, rejecting reforms entails cost both to the country and to the economy,” he said, adding “obstructing the reform agenda hurts the country and not the government.”
The Finance Minister said the government will shortly table new proposals for the civil service reform and for attracting a private investor in the island`s Telecommunication company (Cyta), proposals rejected by the parliament.
He said the government will incorporate positions and concerns by the parliamentary majority in a bid to maintain the reform momentum because this the expectation shared by the international investment community as usually reflected by the rating agencies.
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