Fitch affirms Cyprus’s ‘robust economic growth’ with outlook stable

Credit agency Fitch Ratings on Friday affirmed Cyprus’s ‘BBB-‘ credit rating in a note.

A ‘BBB-‘ rating indicates a low indication of default, but some  business or economic factors could adversely affect the economy.

“The rating of Cyprus reflects its institutional strength and a record of robust economic growth and sound fiscal policy prior to the Covid-19 shock. These strengths are balanced by balance-sheet weaknesses, in particular high public debt and a weak banking sector,” the note commented.

Fitch forecasts growth to recover to 3.5 per cent in 2021 and 4.3 per cent in 2022, broadly in line with the eurozone dynamics, and driven by pent-up consumption demand. The recovery will likely gain momentum only in the second half of 2021, delayed by the recent wave of the pandemic. There is high uncertainty regarding tourism in 2021, given its dependence on arrivals from western European countries where vaccination had a slow start and travel restrictions are expected to be lifted only gradually, the note said.

Fitch forecasts a budget deficit at 3.6 per cent of GDP in 2021 and 2.5% in 2022. The narrowing of the deficit is expected to be mainly cyclical, as substantial structural fiscal consolidation is not expected until 2022. The European Commission extended the suspension of its fiscal rules to 2022 and its latest guidance encourages eurozone members to support the recovery and focus on addressing the short-term consequences of the pandemic.

“The large banking sector remains a weakness relative to ‘BBB’ peers despite a significant fall in non-performing exposures (NPEs) during 2020. Fitch’s Banking System Indicator (BSI) for the highly concentrated banking sector remains among the weakest among rated-sovereigns, at ‘b’. NPEs declined to EUR4.7 billion (16.7 per cent of total loans) by end-2020 from EUR8 billion at end-2019, due mainly to asset sales and write-offs by the two largest banks. The coverage ratio of the remaining NPE stock is 44 per cent, in line with the eurozone average.

NPEs could increase in 2021 as the pandemic-related loan moratorium, which covered around half of performing loans, expired for most loans at end-2020, Fitch warned.

The current account deficit (CAD) had widened before the pandemic to 6.3 per cent of GDP in 2019 due mainly to strong import growth. The impact of the pandemic on tourism led to a further deterioration in the CAD, which is estimated to be close to 10 per  cent in 2020. The surplus on net services in the current account was 20 per cent of GDP in 2019 and had grown by a cumulative 26 per cent since 2014, highlighting the importance of the tourism sector. Fitch forecasts CAD to remain above the pre-pandemic level and exceed 8 per cent of GDP in 2021 and 2022, the note showed.

“Cyprus has a World Bank Governance Indicator ranking at the 76th percentile, reflecting strong regulatory quality, well-established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption,” the note said.