STANDARD and Poor’s (S&P) rating agency on Friday affirmed Cyprus’ long- and short-term sovereign credit ratings at ‘BB-/B’, with a positive outlook, saying it expected the Cypriot economy to continue to grow at more than 2% in real terms over 2016-2019, while strengthening its budgetary position and reducing government debt.
The rating agency said that the financial sector’s high level of nonperforming loans (NPLs) remains the key concern for financial stability and economic performance.
The rating agency said it expected unemployment to decline further to below 13% by 2018, which will support consumption.
It also said that it considered “the possibility of a reunification of the island, which would represent an important positive contribution to the country’s growth rate, even if it presented initial fiscal and external challenges”.
“Last year’s budgetary outcome includes several deficit-increasing one-off items and as a result of this, as well as solid economic growth more than offsetting the removal of public wages and pension freezes, we expect Cyprus’ budgetary position will improve and post surpluses over the forecast period,” S&P said.
Moreover, the rating agency said that ahead of parliamentary elections in May, it did not expect the government to continue with discretionary deficit-reducing measures, but that the government’s budgetary position will benefit from a gradual reduction in unemployment benefits and an increase in cyclical revenue items against the background of continuous economic recovery.
S&P projected that net general government debt will decline below 80% of GDP by 2019 and that general government interest payments will average about 6.3% of general government revenues during 2016-2019. It added that following the conclusion of the €10bn bailout programme this month, potential loss of eligibility for the European Central Bank’s public sector purchase programme will not impair the sovereign’s access to funding in the financial market.
The rating agency said that “financial stability remains a key risk” warning that “given the high level of the NPLs, more resolute measures may be needed to improve the banking system’s asset quality”.
Meanwhile, Moody’s Investors Service said that the sovereign ratings of euro area members will likely remain stable in 2016 and 2017, citing weakening fiscal consolidation, a slowdown in reforms, and political uncertainty.
Cyprus was among the euro zone sovereigns carrying a stable outlook, with only Ireland carrying a positive outlook, and Austria and Finland carrying a negative outlook.
It added that it expects that the European single currency bloc’s economy to grow this year by around 1.5 per cent.