Moody’s Investors Service on Friday upgraded Cyprus’s credit rating a notch from B1 to Ba3 which is still three grades into the speculative area, citing the economy’s resilience and a fiscal overperformance.
Moody’s which kept the outlook at positive said that it reflects “improvements in economic resilience and continuing fiscal outperformance are likely to be sustained, with a reduction in the debt-to-GDP ratio as well as a fall in the stock of non-performing loans held by the banks”.
The economy which emerged from a three-year recession in 2015 when it expanded 1.7 per cent and grew another 2.8 per cent last year is expected to sustain the momentum over the medium term with private consumption being the key-driver supported by a drop in the unemployment rate and an increase in tourist arrivals, Moody’s said in an emailed statement. “We also expect investment growth across the wider economy to recover gradually, in spite of constraints upon domestic credit growth resulting from the large number of non-performing loans in the banking system and the high corporate debt burden.”
The government which generated last year a fiscal surplus of 0.4 per cent of economic output and a primary surplus of 3 per cent, is expected to produce a “a headline deficit of just 0.4% of GDP this year and a primary surplus of around 2.1% of GDP in 2018, lower than the projections of the government but still supportive of further debt reduction,” Moody’s said. “As a result, the debt burden of the government, whilst high, is expected to decline from a debt-to-GDP ratio of 108% in 2016, to around 95% of GDP by 2020.”
Moody’s which last upgraded Cyprus on November 13, 2015 by two notches, said that a further credit rating upgrade is possible with a further decline in non-performing loans in the banking system, which account for almost half of total loans, and government debt and expectations that growth will be sustained at current levels.
On the other hand, possible doubts about the government’s commitment in restoring macroeconomic and financial stability “particularly in the context of a lower growth environment” and evidence of further need to recapitalise banks could result in a downgrading, the rating company said. “A re-emergence of elevated financial and debt market stress, that might be triggered in the case of a country leaving the euro area, for example, would also be credit negative.”