By Constantinos Psillides
BOND CREDIT ratings business Moody’s has upgraded Cyprus’ government bond rating to B3 from Caa3 and has also changed the outlook on the government bond rating to stable from positive and affirmed Cyprus’ Not-Prime (NP) short-term rating.
According to a statement issued on Friday, “the upgrade reflects the government’s progress to date in addressing the country’s key challenges with respect to macroeconomic stability, fiscal consolidation and banking sector stability.”
According to the bond credit rating scale, a Caa3 rating means that “the obligor [bond issuer] is currently vulnerable, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments,” while a B3 rating means that “the obligor is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitments.”
The agency attributes the upgrade to two factors: “The consolidation of the government’s fiscal position, as illustrated by an expected return to a primary budget surplus from 2014, and the expectation that public debt relative to GDP will level off in 2015.” The second factor is the “the stabilisation of Cyprus’ financial sector through the recapitalisation of troubled banks, which, to some extent, lowers the risk that bank-related contingent liabilities will crystallise on the government’s balance sheet.
The Moody’s report also notes that Cyprus has exceeded the targets set with the Troika since in 2013 the primary deficit fell to 2.0 per cent of GDP while the adjustment programme called for a 4.2 per cent. Another contributing factor in the island’s success, according to the report, is the fact that the economic contraction in 2013 and 2014 was not as severe as initially expected.
In Moody’s view, the economic and fiscal outperformance increases the likelihood of the government achieving the rest of its medium-term fiscal consolidation targets of reaching a primary surplus of 4 per cent of GDP in 2018, and thereby succeeding in its objective of putting debt on a more sustainable path.
Moody’s also estimates that the government’s fiscal deficit will likely come down to around 3 per cent of GDP in 2014, from 4.9 per cent in 2013 and 5.8 per cent in 2012, and that the primary balance will improve by 2 percentage points in 2014, generating about 0.1 per cent of GDP in surplus.
Moody’s report is not all positive though. The credit rating agency notes that the government bond is constrained by “substantial credit challenges including a weak economic outlook and the very high and still rising non-performing loans (NPLs) in the banking sector, which generate further negative risks to the government’s balance sheet.
The credit rate agency upgrade was welcomed by the government, with deputy government spokesman Victoras Papadopoulos saying that “it is of great importance and a sign that the country is on the road for recovery.”
In a statement issued on Saturday, Papadopoulos especially welcomed Moody’s comments on the economy exceeding Troika’s expectations
“Of course, obstacles still remain and the core problems that led us to the brink of bankruptcy have not yet been resolved. We need to stay the course and stick to the policy we followed this far until a full recovery is achieved and we go back to a healthy, robust economy with growth and prosperity for all citizens,” read the statement.
Despite the Moody’s rating upgrade, the island’s economy is still stuck in recession according to the news agency Reuters, which cited flash data on Friday.
The data indicate that the pace of decline is flattening out because of a mild yearly increase in tourism revenue and that the output on Cyprus contracted by 0.4 per cent in the third quarter from the second, revised to a fall of 0.4 per cent from an earlier reported 0.3 per cent.
On a yearly basis, GDP fell 2.0 per cent compared with 2.2 per cent in the second quarter, according to Reuters.
“Authorities expect the recession to be narrower than 3.0 per cent for the whole of 2013, and a return to growth of about 0.5 per cent next year. While tourism and trade were performing well in the third quarter, the rate of growth in annual tourism revenue tapered off in August – the last available data – to 2.8 per cent compared to more than 6 per cent in July.”