The finance ministry on Saturday welcomed Moody’s Investors Service decision to change the outlook on Cyprus’ Ba1 ratings to positive from stable, saying this acknowledges the economy’s resilience and potential to overcome challenges.
The finance ministry said Moody’s decision to change the outlook on Cyprus to positive reflects the strong reduction in Cyprus’ public debt ratio this year which Moody’s expects to continue in the coming years, following a reduction of more than ten percentage points of GDP last year.
It is also due the stronger-than-expected economic resilience to Russia’s invasion of Ukraine (Caa3 negative) and also to the pandemic, coupled with solid medium-term GDP growth prospects, which in turn are supported by the EU’s Next Generation package of grants and loans. In the first half of the year, real GDP growth was at 6 per cent, among the strongest performances in the euro area, Moody’s noted.
The rating agency also attributed the decision to ongoing strengthening of the banking sector, with non-performing exposures continuing to decline. It also noted that the banking sector’s exposure to Russia is limited, in stark contrast to the early 2010s.
The affirmation of the Ba1 ratings reflects a combination of comparatively high economic and institutional strength and relatively high exposure to event risks related to the large size of the banking system.
Cyprus’ rating could be upgraded if the sovereign’s fiscal and debt metrics improved broadly in line with Moody’s baseline scenario over the coming 12 months. Continued evidence of strong economic resilience coupled with a high absorption of EU funding and reform implementation of reforms under the national recovery and resilience plan would also support an upgrade, its added.
Further improvements in the banking sector, which would reduce the sovereign’s exposure to banking sector risks, would also be rating positive, Moody’s says.
The positive outlook signals that the rating is unlikely to be downgraded in the near time. However, the outlook would likely be returned to stable if Cyprus’ economic performance turned out materially weaker than expected by Moody’s. A sustained, material deterioration of the government’s fiscal position would also be credit negative, as would a material deterioration of the banking sector’s health.