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S&P upgrades Cyprus to BB+ with stable outlook citing stalled reforms

Standard & Poor’s (S&P) said that it upgraded Cyprus’s sovereign rating to BB+ from BB which is still one notch below investment grade and placed it on stable outlook citing better than expected economic and fiscal performance.

“The stable outlook balances our view of Cyprus’s 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 company said in a statement on its website on Friday adding that it affirmed the B short-term rating. “At an estimated 48 per cent as of end-November 2016, nonperforming loans are among the highest of all rated sovereigns. We believe that the banking sector is reducing asset quality concerns, although we still view financial stability as a main risk and consider the contingent liabilities from the financial sector as moderate”.

“In our view, the deterioration in the banking sector’s asset quality reached an all-time low in early 2015,” it said.

S&P added that it also expects the economy to expand this year 2.7 per cent before growth slows down to 2.5 per cent over 2018 to 2020 adding that it also expects public debt to drop to 90 per cent of economic output by the end of next year. “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,” S&P said.

“We expect labour demand to remain solid and project that the unemployment rate, 13.3 per cent at year-end 2016, will fall below 12 per cent by 2018,” S&P said. “We forecast investment activity to accelerate with foreign private-sector funding contributing to projects in the tourism and energy sectors, also reflecting funding from the European Union (EU), the European Investment Bank (EIB), and the European Bank for Reconstruction and Development (EBRD). Although domestic banks have increased lending activity and the real estate sector has stabilized, the protracted restructuring in the banking sector will constrain construction activity”.

S&P added that it expects that the geopolitical situation in the wider region will allow tourism to continue adding to growth, even at a “lower pace” despite last year’s Brexit vote in the UK.

“In the medium-to-long term, economic growth prospects may also flourish from the exploitation of natural gas fields,” it said. “An additional supportive factor to the country’s growth rate is in the possibility of currently negotiated reunification of the island, which would likely bolster investment activity and increase the economy’s growth potential, despite initial micro- and macroeconomic challenges, and the potentially substantial upfront cost of infrastructure investments in the north”.

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