Government ‘fully committed’ to strengthening fiscal position

The government remains firmly committed to strengthening Cyprus’ fiscal position, promoting sustainable recovery and the long-term stability of the Cypriot economy, Finance Minister Constantinos Petrides said on Saturday after DBRS upgraded its credit rating for Cyprus.

“Fiscal recovery has proceeded much faster than expected in 2021, with the fiscal deficit falling to 1.8% of GDP from 5.6% of GDP in 2020, mainly due to strong revenue growth,” Petrides said.

He was speaking after DBRS Morningstar upgraded Cyprus’ Long-Term Foreign and Local Currency – Issuer Ratings from BBB (low) to BBB and changed the trend from Positive to Stable. At the same time, DBRS upgraded the country’s Short-Term Foreign and Local Currency – Issuer Ratings from R-2 (middle) to R-2 (high) and changed the trend from Positive to Stable.

According to the agency, the ratings upgrades reflect Cyprus’ stronger-than-anticipated economic and public finance performance during 2021 and DBRS’ expectation that medium term conditions remain supportive of Cyprus’ debt reduction efforts, despite risks posed by Russia’s invasion of Ukraine and the pandemic.

Petrides added that “the agency notes that Cyprus returned to a small primary surplus of 0.1% of GDP in 2021”, adding that “against this backdrop, Cyprus’ public debt ratio fell from 115.0% of GDP in 2020 to 103.9% of GDP in 2021”.

“The continued reduction in non-performing loans and the limited impact of the pandemic on banks’ asset quality are supportive factors for the upgrade,” Petrides added.

“Improvements in fiscal management and policy, debt and liquidity, and monetary policy and financial stability are key drivers”.

According to the minister, DBRS justifies its decision to upgrade the Republic’s credit rating to BBB on the basis of the prudent public debt management policy, the government’s historically positive performance in terms of its ability to reduce the fiscal deficit, Cyprus’ participation in the Eurozone and its favourable business and investment climate.

“According to the agency, the rating upgrade reflects Cyprus’ better-than-expected economic and public finance performance in 2021 and the expectation that medium-term conditions remain supportive of Cyprus’ debt reduction efforts, despite the risks posed by Russia’s invasion of Ukraine and the pandemic,” Petrides said.

In its report DBRS Morningstar expressed expectations for direct and indirect negative impacts on Cyprus’ economy from Russia’s invasion of Ukraine on economic growth in 2022, given the island’s high exposure to Russia, especially in the tourism and professional services sectors where recovery will be slower than expected.

Also, increasing energy prices will exacerbate the already elevated inflationary pressures and further erode household’s purchasing power.

Nevertheless, DBRS takes the view that Cyprus’ medium-term economic prospects remain solid and the country should be well placed to manage and adjust to the shock.