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Moody’s warns over small economy and high debt level

The credit profile of Cyprus (Ba2 stable) reflects its small but wealthy economy, improved economic resilience and the government`s fiscal outperformance in the wake of the country`s banking crisis, Moody`s Investors Service has said in an annual report.

Moody’s warned on Wednesday that it could change the rating outlook to negative if the positive debt trend were to reverse, or if recent legislative actions in the banking sector failed to significantly reduce non-performing exposures (NPEs).

“Cyprus` strong growth trends and primary surpluses have generated positive debt trends, and we expect deleveraging to resume this year, after a one-off spike in the debt burden in 2018 associated with the capital injection to Cyprus Cooperative Bank,” said Sarah Carlson, a Moody`s Senior Vice President and the report`s co-author.

According to Moody’s, “Cyprus` credit challenges stem from its small and relatively undiversified economy, as well as high levels of government, banking and household debt”.

It noted that “increasing spending pressures have the potential to weigh on fiscal prospects, while the large financial sector is burdened by the highest non-performing exposure (NPE) ratio in the European Union”.

The stable outlook, said Moody’s, reflects the balanced risks following the country`s financial crisis. Debt dynamics are robust and so debt metrics will likely improve steadily.

“The evolution of the sovereign rating and outlook will be driven largely by debt trends and banking sector issues. If Moody`s were to conclude that macroeconomic conditions and policy actions were to result in a sustained and significant decline in the government debt stock and the stock of NPEs in the banking sector, the rating agency would consider changing the rating outlook to positive”, the report noted.

Conversely, it stressed, “negative rating pressure would emerge if the debt trend were to reverse, or if recent legislative actions in the banking sector failed to significantly reduce NPEs”.

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