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Rating agency upgrades Cyprus, factors in EU membership benefits

Cyprus Business Now property market high rise buildings trilogy limassolLimassol coastline sea Lemessos photo credit Kyriacos Nicolaou
Limassol coastline (Photo: Kyriacos Nicolaou)

International rating agency Capital Intelligence on Saturday announced that it has upgraded the long-term rating of Cyprus in foreign currency to “BBB-“, from “BB+”.

At the same time, the agency upgraded Cyprus’s short-term rating to “A3”, from “B”, while setting the outlook for the Cypriot economy to stable, from positive.

“The upgrade reflects the proven resilience of the Cypriot economy and the improvement in fiscal fundamentals, with the fiscal deficit and general government debt returning to a sustainable path faster than expected,” the agency said.

The agency said that the stable outlook indicates that ratings will remain unchanged over the next 12 months and balances risks from a possible economic slowdown in the Eurozone and prolonged periods of high energy and food prices against improved shock absorption capacity, combined with the state’s strong economic performance.

Moreover, the agency said that the outlook could be revised to positive in the next 12 months if there is a continued improvement in macroeconomic and fiscal fundamentals, supported by comprehensive structural reforms. This could lead to a faster-than-expected reduction in public debt. In addition, ratings could be upgraded if banks increase their efforts to improve asset quality and loan coverage.

What is more, Capital Intelligence noted that the government continues to proactively manage public debt, securing its financing needs through timely market access, while maintaining a “significant cash reserve to deal with short-term shocks.”

The report said that potential obligations of the government derived from the banking sector, “have decreased significantly in recent years, although they remain comparatively high”.

“Other fiscal risks currently appear to be manageable, despite the difficult external environment related to the fallout from the war in Ukraine,” Capital Intelligence said.

Furthermore, the agency said that Cyprus’ ratings also reflect the benefits it receives from its membership in the European Union and the Eurozone, including the financial support available from the Recovery and Resilience Fund.

According to the report, the agency expects real GDP growth to average 4.7 per cent in 2022, fueled by resilient private consumption and investment in many economic activities supported by financing through the Recovery Fund.

There is also an expectation that GDP growth will fall to an average of 3 per cent in 2023-24.

Capital Intelligence also said that it has revised its baseline scenario, now expecting a general government budget deficit of 0.5 per cent of GDP in 2022, compared to its previous expectation of a deficit of 1 per cent.

Going forward, Capital Intelligence said that it expects the overall fiscal position of the general government to return to a surplus, averaging 1.1 per cent of GDP between 2023 and 2024.

“Reflecting the improvement in Cyprus’ fiscal position, general government debt fell significantly, dropping to 96.1 per cent of GDP in the first half of 2022, while it is set to drop further to 80.6 per cent in 2024,” the agency concluded.

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