Strong economic growth in Cyprus and the expectation of policy continuity after the outcome of the recent presidential elections “should underpin” improving public finances, Fitch Ratings believes, adding however that very weak asset quality in the banking sector remains a risk to recovery.
In a commentary on Cyprus, the international rating agency also notes that President Nicos Anastasiades “has pledged to re-start reunification talks, although it is unclear how much substantial progress is possible in the near-term.”
“Reunification would create long-term economic benefits but would also entail short-term costs and uncertainties,” it said.
According to Fitch “the recent tension between Turkey and Cyprus over the obstruction of a ship exploring gas fields south of Cyprus illustrates the challenges to reunification.”
“While it can be difficult to estimate how far a post-crisis economic recovery is cyclical and the degree to which it signifies changes in trend growth, the strength of the recovery, and experience in Ireland and Spain, suggest that a medium-term growth rate of 2 per cent is plausible,” it added.
Fitch expresses further expresses the view “coupled with gradually increasing effective interest rates and continued primary surpluses, this would see debt-to-GDP fall to around 80 per cent in 2022.”
The agency comments on preliminary data released Wednesday which show that Cyprus’ GDP grew by 1.1 per cent quarter-on-quarter in the fourth quarter of 2017.
“Overall, GDP grew by 3.9 per cent in 2017 as strong private consumption and solid export growth, including services exports from tourism, boosted the economy,” Fitch said.
It expresses the view that “economic and fiscal policy continuity is likely following the re-election of Anastasiades.
“The main risk to the economic recovery, and a key sovereign rating weakness, is the very weak asset quality in the banking sector following the 2013 crisis,” the credit rating agency says.
Non-performing exposure (NPE) ratios remain stubbornly high, 43% of gross loans at end-October 2017 and constrain new lending, it added.
Fitch acknowledges that NPEs were declining but noted that this was happening “only gradually despite the private sector`s improved payment capacity as the economy and employment grow.”
“Cleaning up bank balance sheets will take considerable time at the current pace, while efforts to speed up non-performing mortgage resolution could weaken household consumption,” it says.
According to the rating agency “high external indebtedness is another structural weakness that will take time to address.”