Fitch Affirms Cyprus at ‘BBB-‘, outlook Stable

Fitch ratings agency has affirmed Cyprus’ long-term credit rating at BBB- with a stable outlook, reflecting the island’s institutional strength and a record of robust economic growth and sound fiscal policy prior to the Covid-19 shock.

The agency noted however, that these strengths are balanced by balance-sheet weaknesses, in particular high public debt, and a weak banking sector.

Fitch said it expected a real GDP growth of 4.8 per cent in 2021, partly due to strong base effects, and a gradual normalisation of growth rates in 2022 and 2023 of 3.7 per cent and 2.9 per cent, respectively, following a downturn of 5.1 per cent in 2020.

Fitch noted that economic rebound in Cyprus was stronger than in the eurozone during the second and third wave of the pandemic in late 2020 and early 2021.

“Tourism and domestic demand will both support the recovery, although there is still uncertainty regarding the fourth wave of the pandemic and its impact on economic sentiment and air travel within the EU,” the agency added.

Growth will also be supported by the Next Generation investments over the medium term, consisting of €1bnn in grants and €200m in loans, plus an additional €1bn in private investment.

Fitch forecasts a budget deficit of 5.2 per cent of GDP in 2021 after a 5.7 per cent deficit in 2020.

“We expect a gradually shrinking deficit from next year, reaching 2.4 per cent of GDP in 2023. The narrowing of the deficit is expected to be driven by an end to the pandemic support measures, and no substantial structural fiscal consolidation is expected until 2023, based on EU guidance,” the agency added.

With regard to Cyprus’ public debt, the agency said that Gross general government debt surged to 119 per cent of GDP in 2020, exceeding the 109 per cent peak in 2014 and well above the `BBB` current median of 57 per cent.

“While debt is still elevated, Cyprus continues to enjoy very favourable financing conditions,” Fitch added.

Fitch pointed out that the banking sector remains “a weakness relative to `BBB` peers,” noting that the “highly concentrated banking sector remains among the weakest of rated sovereigns, at `b` and the Outlooks on the IDRs of the two major banks are Negative”.

The agency noted that the fall in non-performing exposures (NPE) slowed in the first half of 2021, declining by €143m in 1H21 to €4.6bn, equal to 16.5 per cent of total loans after falling by over €3.7bn (from €8bn at end-2019), due mainly to asset sales and write-offs by the two largest banks.

Noting that borrower’ repayment behaviour following the expiry of a loan payment holiday in the end of 2020 is encouraging, Fitch points out that “downside risks remain.”

“Improvement of the banks` asset quality depends on execution of large NPE transactions,” Fitch said.