Fitch ratings agency has affirmed Cyprus’ Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook.
According to Fitch, Cyprus’ rating balances its institutional strength reflected in per capita GDP and governance indicators in line with the ‘A’ median rather than ‘BBB’ and a track record of robust economic recovery and sound fiscal policy prior to the Covid-19 shock with balance sheet weaknesses, in particular, further increase in the high public debt and declining, but still elevated non-performing exposures (NPEs) in the banking sector.
Finance Minister Constantinos Petrides commented on Saturday saying Cyprus’ institutional strength was reflected in per capita GDP, a history of strong economic recovery and sound prudent fiscal policy before the coronavirus crisis were the factors that balanced and helped in maintaining the country’s ranking.
“The credit rating also indicates that despite the challenges facing the country as a result of the impact of the coronavirus pandemic on the economy in general and on tourism in particular, domestic demand remained resilient due to relatively low virus transmission rates and relatively limited scope of restrictive measures,” he said.
“The assessment also notes that although the pandemic halted the gradual improvement in the labour market that began in 2014, the deterioration was relatively mild. This limited impact on the labour market is due in part to government support measures and the flexibility of specific sectors,” the minister concluded
According to Fitch, The Covid-19 pandemic has led to a deep recession of the Cypriot economy in 2020, similar to many rating peers. GDP contracted by 11.6 per cent qoq in 2Q20 following a 2.1 per cent fall in 1Q20. Tourism was hit particularly hard, with tourist arrivals more than 80 per cent lower in January-August 2020 than a year ago, while domestic demand was more resilient due to the relatively low infection rates and limited lockdown measures, Fitch said.
Fitch forecasts a 6 per cent GDP contraction in 2020 followed by a 4 per cent rebound in 2021 and 2.7 per cent growth in 2022 based on positive qoq growth rates from 3Q20 onwards. The forecast implies that the level of GDP will be 2pp lower in 2021 than the pre-crisis level. Cyprus had a strong track record of growth before the pandemic with average growth in the five years to 2019 of 4.4 per cent, above the ‘BBB’ median of 3.6 per cent. Fitch maintains its assumption of 2 per cent growth potential over the medium term, unchanged by the pandemic.
The pandemic ended the gradual improvement in the labour market, which started in 2014 from a peak unemployment rate above 16 per cent, but the deterioration from 6.3 per cent in 4Q19 to 6.8 per cent in 2Q20 was comparatively mild. The subdued labour market impact of the deep recession is partly due to government support measures and the flexibility of key industries, like tourism, reflected for example in the high share of seasonal foreign workers in the sector.
It said the large banking sector remains a weakness relative to ‘BBB’ peers due primarily to the weak asset quality, notably very high NPE ratios that are still weighing on capital and profitability. The total balance sheet of the banking sector was €58 billion in June 2020, practically unchanged since the end of 2018 as the deleveraging trend in the early years of the recovery has stalled.
At the same time the NPE stock was €5.7 billion at the end of 1H20 as it declined by €2.3 billion due mainly to asset sales and write-offs by the two largest banks.
“The NPE ratios remain among the highest in the EU at 20 per cent of total loans and 28 per cent of GDP,” Fitch said.
It also said NPEs were likely to increase due to the Covid-19 shock.
“About half of total performing loans in Cyprus are in a moratorium until end-December 2020. The measure will limit the increase of NPEs in the short term and support borrowers’ liquidity in 2020. It remains hard to assess which portion of these loans will become non-performing,” Fitch added.