By Peter Stevenson,
THE beleaguered Cyprus economy got its first nod of approval yesterday when rating agency Standard & Poor’s issued the first upgrade in nearly three years.
S&P raised its long-term sovereign debt rating on Cyprus to B- from CCC+ , saying the immediate risks to its debt repayments appeared to have receded.
“The stable outlook reflects our view of the implementation risks that remain as the end of the three-year European Commission, International Monetary Fund, and European Central Bank (“Troika”) programme approaches, balanced against the upside potential we see coming from Cyprus’ economy,” the agency said.
Reaction in Nicosia was swift with president Nicos Anastaiades saying the upgrade “is not only the result of painful sacrifices on behalf of the people, but also the coherent and decisive policy of the government and political parties over the past eight months.”
In an effort to revive the international market’s trust in Cyprus, Anastasiades said his government “will continue with the same prudent and disciplined policy to manage the difficulties ahead.”
“Today’s upgrade by one of the most stringent rating agencies, S&P, the first after three years of downgrades, is the result of the painful sacrifices of our people and the coherent and decisive policies we have all been following for the past eight months,” he said.
“Even if I express my satisfaction, I do not believe that this is the time for victory speeches, but certainly similar messages, such as this by the specific rating agency, strengthen the gradual restoration of trust in the Cypriot economy, an element necessary to revive our economy as soon as possible,” he added.
In its report, S&P said that having successfully completed the first two Troika programme reviews, the Cypriot government will continue to timely comply with the recommendations it has agreed with the Troika.
The programme has improved the government’s debt profile, covering its borrowing requirements (apart from 6 per cent of GDP in short-term debt) through to March 2016.
“For this reason, we are revising our GDP forecasts for 2013 and 2014 to -8 per cent and -6 per cent, but we remain uncertain about these estimates. Factors preventing a more severe contraction – savings have helped to support consumption and Cyprus’ tourism and business services sectors have proved resilient – are, in part, temporary,” S&P said.
“Financial stability does, however, remain a key risk, in our opinion. Once capital controls are lifted, the stability of private sector deposits will be uncertain,” they said.
“In our view, the Cypriot authorities could potentially be unable to meet the €1.4bn privatisation objective (equivalent to 8 per cent of GDP) through to 2018, due to political and popular resistance to state asset sales,” S&P said.
However, the S&P report said there are also potential upside risks to the government’s credit profile. Primarily, if current exploration for oil and gas in offshore fields were to yield additional discoveries, this could materially improve the Cypriot government’s revenues.
“We also note that the Troika programme provides little margin for error; fiscal slippage, either through implementation problems, lower-than-anticipated growth, or additional financial sector recapitalisation needs, could deplete programme buffers, leaving a financing gap,” they said.
S&P said they could lower the ratings if the government appeared unable to fulfil the Troika’s conditions or if a large government financing gap emerged.
“In our view, the biggest risk to complying with Troika borrowing conditions will likely be in the area of the government’s privatisation targets. We expect that the first steps toward privatising public enterprises (telecoms, electricity utilities and the port authority) could potentially trigger opposition from those with vested interests in these sectors, and could likely require a change in Cyprus’ constitution,” the report said, in a clear reference to the trade unions that have been threatening with all-out strikes, without, however, providing any alternative solution to raise the €1.4bn the government needs.
If the economy does not start growing again by the first half of 2015, the Troika would, in S&P’s view, likely reappraise the financing assumptions in its memorandum of understanding with Cyprus.
“We could raise the ratings if the economy were to bottom-out sooner and at higher levels than we currently project, enabling general government debt to GDP to plateau earlier and lower,” S&P said.
Stabilisation of the financial system would likely be a prerequisite for renewed growth. Ratings could also improve if the fledgling oil and gas sector appeared likely to boost economic activity over the 2013-2016 rating horizon, the report said.
Below is a list of euro zone sovereign ratings assigned by Standard & Poor’s:
Austria AA+ s
Belgium AA n
Cyprus B- s
Finland AAA s
France AA s
Germany AAA s
Greece B- s
Ireland BBB+ p
Italy BBB n
Luxembourg AAA s
Malta BBB+ s
Netherlands AA+ s
Portugal BB CWn
Slovakia A s
Slovenia A- s
Spain BBB- s
p= positive outlook; s= stable outlook; n= negative outlook; CWn credit watch