Fitch has upgraded its rating on Cyprus’ to ‘BB+’ from ‘BB’ because of the country’s strong cyclical economic recovery and prudent fiscal policy.
Fitch’s rating on Cyprus is now just one step below investment grade and the outlook is positive, although the agency said weakness in the banking sector is still a risk to public finances.
“We forecast the government will continue recording fiscal surpluses of 1.1% of GDP in 2018 and 2019, after over-achieving is fiscal target in 2017 with an estimated surplus of 1.9% of GDP, compared with a ‘BB’ median fiscal deficit of 3.2%,” Fitch said in a press release on Saturday.
Finance Minister Harris Georgiades said progress being made by the country is being recognised.
“Fitch upgrade: We still have difficulties that we must face. But our country’s progress is being recognised. And we can lift Cyprus even higher, as long as we continue the effort with confidence, consistency, and collective responsibility,” Georgiades tweeted.
Fitch said that future developments that may, individually or collectively, lead to a further upgrade include the reduction of non-performing loans (NPLs) in the banking sector, which will reduce contingent liabilities.
The agency said there are not currently any developments anticipated that would lead to a downgrade.
However, it added that some future developments, such as failure to improve asset quality in the banking sector and the deterioration of budget balance resulting in the stagnation of the declining government debt-to-GDP ratio, may lead to a negative rating action.
Fitch’s projections did not take into account future privatisations scenarios, or projections relating to the potential exploitation of natural gas reserves off the coast of Cyprus.
On the Cyprus issue, the ratings agency said it does not expect substantial progress in the coming quarters, adding that, ‘the reunification would bring economic benefits to both sides in the long term, but would entail short term costs and uncertainties.’
Fitch said Cyprus’ external financing flexibility has improved since its exit from the macroeconomic adjustment programme in March 2016.
“The government tapped international markets in June 2017 and external interest payments are set to decrease to 6.6% of current account receipts in 2018-2019, down from an average 16.2% in 2011-2012. Cyprus is also attracting large foreign direct investments in the construction, tourism, energy and education sectors. Cash reserves were EUR1.2 billion at end-2017 covering expected gross financing needs for 2018,” the press release said.