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DBRS Morningstar confirms Cyprus at BBB (low)

DBRS Ratings Limited (DBRS Morningstar) confirmed Cyprus’s Long-Term Foreign and Local Currency – Issuer Ratings at BBB (low) and changed the trend to Positive from Stable. At the same time, DBRS confirmed Cyprus’s Short-Term Foreign and Local Currency – Issuer Ratings at R-2 (middle) and changed the trend to Positive from Stable.

The Positive trend reflects DBRS Morningstar’s view that the outlook for the downward trajectory in the public debt ratio has improved, driven by sustained robust economic growth, large primary surpluses and early debt repayments. While moderating, economic growth in Cyprus is projected at around 3% in 2019 and 2020, among the strongest in the Euro area.

“Cyprus’s fiscal position has also continued to improve, with the fiscal surplus reaching sizable levels, and the government is planning to repay the IMF loan in advance next year,” it said.

However, the materialisation of fiscal risks could delay the reduction in public debt, but strong growth, together with large fiscal surpluses and early debt repayments, is still expected to contribute to the decline in the government debt-to-GDP ratio over the coming years. The improvement in DBRS Morningstar’s building block of “Debt and Liquidity” was the key factor for the trend change, the statement added.

The BBB (low) ratings are supported by Cyprus’s solid budget position, its prudent public debt management framework, its Eurozone membership fostering sustainable macroeconomic policies, and its openness to investment encouraging a favourable business environment. Nevertheless, Cyprus also faces significant credit challenges related to sizable non-performing exposures (NPEs) in the banking sector and the economy, high levels of private and public sector debt, external imbalances, and the small size of its service-driven economy, which exposes Cyprus to adverse changes in external demand.

“The ratings could be upgraded if healthy economic growth is sustained and the fiscal position remains sound, contributing to the downward trajectory in the public debt ratio. Further progress in substantially reducing banks’ NPEs and private sector debt, and the strengthening of the banking sector would also be positive for the ratings,” the statement said.

“However, the Positive trend could be changed back to Stable if growth weakens significantly and the fiscal position worsens substantially. A reversal of the downward trajectory in NPEs could also be negative for the ratings.”

DBRS said that after a large increase in 2018, the government debt-to-GDP ratio is expected to decline at a relatively rapid pace over the next years. The government’s support associated with the sale of Cyprus Cooperative Bank (CCB) impacted government debt in 2018. But the debt ratio is projected at 95.6% in 2019, according to the latest government forecasts, down from 100.6% in 2018. By 2021, IMF and European Commission projections point to a debt ratio well below 90%. The factors contributing to the rapid debt reduction are strong economic growth, large primary surpluses of around 5% of GDP, and early debt repayments. The government repaid the Russian loan in September 2019 and is looking to fully repay the IMF loan in advance in 2020.

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