DBRS Morningstar confirms Cyprus ratings at BBB (low), stable trend

DBRS Ratings GmbH (DBRS Morningstar) has confirmed Cyprus’ Long-Term Foreign and Local Currency – Issuer Ratings at BBB (low). Short-Term Foreign and Local Currency – Issuer Ratings have been confirmed at R-2 (middle). The trend on all ratings is stable.

In a statement, DBRS said that the stable trend reflects DBRS Morningstar’s view that risks to the ratings are broadly balanced despite the considerable deterioration in economic performance and public finances caused by the global pandemic.

Following a period of robust economic growth, Cypriot GDP contracted sharply by 5.1% in 2020, although less severely than the euro area. The fiscal surplus turned to a deficit of 5.8% of GDP in 2020 and the public debt-to-GDP ratio rose to a still manageable 119.1% in 2020.

It said the still challenging pandemic situation in the first months of this year, requiring tighter restrictions and additional support measures, led to adverse revisions to growth and fiscal deficit forecasts in 2021. Nevertheless, DBRS Morningstar expects the Cypriot economy eventually to recover from the Covid-19 shock and the increase in the public debt ratio to reverse, although the pace of the economic recovery, particularly that of the tourism sector, remains uncertain and dependent on successfully controlling the virus.

It notes that notwithstanding the turbulence caused by the pandemic, Cypriot banks managed to substantially reduce their stock of non-performing exposures (NPEs) from EUR 9.1 billion in 2019 to EUR 5.1 billion in 2020, mostly through sales and write-offs. At the same time, legacy NPEs remain sizable and new problematic assets could surface as public support is withdrawn, especially as an extensive loan repayment moratorium ended in December 2020. Early indications suggest limited impact thus far.