Fitch Ratings has upgraded Cyprus by one notch from ‘B+’ to ‘BB-’with a positive outlook on continuing strong progress in its adjustment following the 2013 banking crisis.
Cyprus exited its EU and IMF bailout programme in March, outperforming fiscal and economic targets. It also successfully lifted capital controls and has taken steps to restructure its banking sector.
Finance Minister Harris Georgiades expressed satisfaction over the upgrade but warned that it should not lead to complacency.
“Upgrades please us but in no way should they lead us to complacency,” he wrote on his Twitter account.
Fitch said the economic recovery, now into its second year, was supporting employment, bank asset quality adjustment, and public finances.
“Fitch is projecting GDP growth of 2.9 per cent in 2016 (from 1.9 per cent projected a year earlier). A strong 1H16 outturn was supported by private consumption and investment, and reflected broad based growth across industries, most notably in tourism.”
Unemployment reached 12.1 per cent in 2Q16, from 14.9 per cent in 2015.
The banking sector is gradually strengthening, proven by the rise in deposits and stable capitalisation.
“Deleveraging is ongoing, with overall sector assets down to 3.7 times the GDP in June 2016 from almost six times in 2009,” Fitch said.
The Bank of Cyprus — placed into resolution in 2013 and recapitalised partly through a bail-in of depositors — has reduced its reliance on emergency liquidity assistance, to €1.5bn by August 2016 from over €11bn in April 2013.
The property sector remains illiquid but prices seem to be stabilising at around 30 per cent below their 2008 peak.
“A strong track record of fiscal policy management provides confidence that authorities will remain committed to government debt reduction in line with fiscal targets. The budget is close to balance, although the 2017 budget includes tax relief measures that will widen the deficit, based on government projections, to 0.6 per cent of GDP in 2017 from 0.3 per cent in 2016.”
However, according to Fitch, banks remained fundamentally weak and posed an ongoing risk to economic stability due to the high level of non-performing exposures.
Despite a fall in the stock of NPEs, the ratio to total loans stood at 48 per cent in August 2016, still the highest of all Fitch-rated sovereigns and up from 45 per cent at end-2015. Excluding overseas branches and subsidiaries, the ratio is even higher, at 57 per cent.
Cyprus is still running a sizeable current account deficit, which implies that further economic rebalancing may be required over the medium term. It was 3.7 per cent of GDP in 2015, albeit down from over 15 per cent in 2008.
Fitch said a reunification deal would benefit both sides in the long term by boosting the economy, but would entail short-term costs and uncertainties.
Focus on reaching an agreement could divert political capital away from structural reform implementation, where progress to-date has been mixed.
The improved economy and exit from bailout programme could reduce the urgency for reform. “Additionally, municipal elections in December, and presidential elections in 2018, could further delay progress in politically sensitive areas, including public administration reform and the telecom company privatisation.”