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Banking and Finance Business

DBRS Morningstar changes trend on Cyprus to positive

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DBRS Morningstar credit rating agency has confirmed Cyprus’ long-term foreign and local currency – issuer ratings at BBB (low) and changed the trend to positive from stable.

At the same time, it confirmed Cyprus’ short-term foreign and local currency – issuer ratings at R-2 (middle) and changed the trend to positive from stable.

The credit rating agency said that the positive trend reflected its expectation that Cyprus’ public debt ratio “will most likely return to its pre-pandemic downward path, starting this year, underpinned by a solid economic growth, fiscal repair, and a reduction in the cash buffer”.

It said that Covid-19 continued to pose challenges and bring uncertainties to the economic and fiscal outlook; however, the agency viewed favourably “Cyprus’ relative economic performance and improving health situation”.

“Despite the importance of tourism-related activities, the Cypriot economy has proven more resilient than anticipated, setting the conditions for strong growth in the medium term. The prospects for recovery of foreign tourism to the pre-Covid-19 levels over time and European Union (EU) funds disbursement and reform effort should also support this,” DBRS Morningstar said.

The effective implementation of the investments and reforms under Cyprus’s National Recovery and Resilience Plan (NRRP) could lead to improved longer-term prospects for the country it said.

“Against this backdrop, the fiscal position is expected to strengthen and eventually return to healthy surpluses. In addition, the public debt ratio reduction will be supported by the stock-flow adjustment effect as an extraordinarily high cash buffer is partially unwound.”

DBRS Morningstar viewed positively the banking system’s “substantial reduction of non-performing exposures (NPEs) in 2020 and the performance of the asset quality metrics thus far. However, legacy NPEs remain sizable and new problematic assets could surface as public support is withdrawn,” it warned.

“The BBB (low) ratings are supported by Cyprus’s prudent public debt management framework, its good track record with respect to fiscal deficit reduction, its eurozone membership fostering sustainable macroeconomic policies, and its openness to investment encouraging a favourable business environment.”

Nevertheless, it cautioned, “Cyprus also faces significant credit challenges related to still sizable legacy NPEs in the banking sector and the economy, high levels of private and public sector debt, external imbalances, and the small size of its service-driven economy, which exposes Cyprus to adverse changes in external demand.”

 

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