“The process of recovery in Cyprus will be slow, but steady, with a 5.5 per cent increase in 2021, but with full recovery probably lasting through 2022,” Sebastien Boreux, primary credit analyst at S&P Global Ratings in Paris told the Cyprus Mail in an interview.
Standard & Poor’s Global Ratings on 4 Sept affirmed Cyprus’s BBB-/A-3 sovereign credit ratings for Cyprus, with a stable outlook. According to the S&P website, this is an “adequate, investment grade” rating.
“We anticipate the economy will rebound in 2021, although not to pre-crisis GDP levels, before 2022 or later. Our base-case assumption remains that the economic effects of pandemic will start subsiding in the second half of 2020, with a gradual acceleration in economic activity. The authorities’ stimulus packages should support recovery. Momentum will also stem from an uptick in private consumption–despite being slowed by decelerated debt repayment, especially as the loan moratorium implemented to support the economy ends.”
“The forecast for recovery, however, in Cyprus as in most other countries, depends on our assumption that an effective vaccine will be available from mid-2021.” Boreux cites the solid management of the pandemic in Cyprus, but warns of uncertainty, and the danger of shocks. “As a small economy, heavily dependent on tourism, Cyprus is vulnerable to external shocks,” he adds.
What may also slow recovery in Cyprus is the high level of private debt. “Public debt is high, but is being well-managed, and is helped by supportive ECB monetary policies,” Boreux explains. “But the level of private debt is threatening, as markedly lower-than-projected economic growth in the coming years could impede private debt servicing and financial sector improvements.
Boreux is also concerned about asset quality at the major banks. “There is a likelihood that more non-performing loans will appear in 2021, as the business climate will remain challenging. The sale of a large percentage of these loans by the banks could mitigate this, as such sales have been successful in 2018 and 2019.”
Direct fiscal measures and the operation of automatic stabilizers will create a deficit of 4.6 per cent GDP in 2020. We expect Cyprus’ current account deficit to widen this year as exports drop due to a global standstill in tourism. Lower imports, hindered by reduced private consumption and delayed investment projects, will not fully offset the decline in exports.
Nevertheless, we see the current account deficit narrowing progressively over the medium term. The completion of important infrastructure projects in 2021-2022, related notably to casinos and marinas, should energize the tourism industry while curbing the need for capital imports.
The strong cash buffer that the Cyprus government has accumulated, along with good fiscal support, and the proactive measures taken by the government, and the EU, should boost recovery substantially, Boreux notes.