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S&P, Fitch raise Cyprus ratings

25 April, 2014

Standard and Poor’s and Fitch have raised their sovereign credit ratings for Cyprus by one notch, following a similar move a month ago by Moody’s.
S&P raised its long-term sovereign credit ratings to ‘B’ from ‘B-’, affirming its short-term sovereign credit ratings at ‘B’, saying the positive outlook incorporates the possibility that it could again raise the rating on Cyprus within the next 12 months if the bailed-out island continues to comply with the Economic Adjustment Programme imposed by the Troika of international lenders..
Fitch Ratings revised the outlook on the Cyprus long-term foreign currency Issuer Default Rating (IDR) to ‘stable’ from ‘negative’ and affirmed the IDR at ‘B-’. The agency also upgraded the long-term local currency IDR to ‘B-’ from ‘CCC’.
On March 23, Moody’s changed the outlook on the Cyprus Caa3 government bond rating to ‘positive’ from ‘negative’, as a result of the better-than-expected economic and fiscal performances of the country in 2013, while it also affirmed the island’s Caa3 rating, to reflect the still-elevated risk of Cyprus defaulting on its debt, or undergoing debt restructuring over the medium term.
S&P said that Cyprus appears to be meeting the terms of the €10 bln bailout financed by the European Stability Mechanism and IMF, suggesting reduced risk to Cyprus’ full and timely payment of its debt service. GDP contracted less than what S&P projected last year, adding “we think Cyprus will likely repeat its 2013 outperformance of budgetary targets in 2014”.
Total Cyprus GDP in 2013 was €16,504 mln compared to €17,720 mln in 2012.
The rationale behind behind the upgrade, said S&P, primarily reflects Cyprus’ better-than-expected economic performance based on its resilient tourism and business services sectors, and the fact that consumer spending in the private sector has not dipped as much as the rating agency had anticipated.
“In addition, the government outdistanced its 2013 fiscal targets by a considerable margin, and we anticipate a repeat performance in 2014. The government also continues to implement the Economic Adjustment Programme … as planned, reducing the risks to full and timely payment of its debt service.”
S&P said external risks to the Cypriot economy would increase if it saw an escalation in the EU sanctions on Russia. Further sanctions could affect Russian tourism to Cyprus, for example, with Cyprus government officials not too keen to impose harsher sanctions on Russia over its role in Crimea.
“In our view, a decline in Russian tourism would adversely affect Cyprus’ economic growth, particularly when coupled with the weakening Russian rouble already hurting Cyprus’ tourism sector. By contrast, though, any progress in Cypriot reunification could unlock economic potential and increase the island’s attractiveness to foreign capital”.
Financial Mirror calculations put Russian tourist arrivals in 2014 at around 800,000, up from the near 600,000 reported last year, making this the second biggest market for tourism, after the U.K., that still accounts for about 1 mln arrivals.
Meanwhile, Fitch said the issue ratings on Cyprus’s senior unsecured foreign-law bonds have been affirmed at ‘B-’ and the issue ratings on unsecured local-law bonds have been upgraded to ‘B-’ from ‘CCC’.
Explaining the outlook revision and the upgrade, Fitch repeated similar cokments by S&P, saying that the reform implementation under the EU-IMF programme continues to progress, supporting policy coherence and credibility.
“In particular, wages and prices are adjusting downwards in contrast to previous episodes of recession. Driven by spending cuts in the public sector, compensation per employee fell 6% year-on-year in 2013. In the private sector compensation per employee fell by 5.3%. Fitch expects the government to continue to adhere to programme parameters, following parliamentary approval on privatisation plans despite initial resistance from some political parties.”
Fitch said fiscal targets have been exceeded by a significant margin, it added while the general government deficit to GDP (GGD) ratio was contained at 5.4% in 2013, below the projected 7.8% under the second Troika review of the programme and Fitch’s previous forecast of 6.7%. The outcome reflects a large fiscal correction and a less severe-than-expected recession. Tight expenditure control contributed significantly to the favourable outcome. Fitch has revised its fiscal deficit projections to 5% of GDP in 2014 and 4.6% in 2015, from 7.5% and 6.9%, previously.
The economy has proven to be more resilient than previously expected, the rating agency said, adding that tourism and professional services have shown some resilience, households have also been using their savings to smooth their consumption, and the risk of a repeat of Cyprus restructuring its domestic law bonds, which occurred in 2013, has reduced.
The restructuring of the banking sector has also undermined the potential growth of the economy and unemployment will remain elevated in the near term. Public debt, at around 112% of GDP in 2013, was almost three times higher than the ‘B’ median of 42% and has yet to peak. There is little further fiscal scope to absorb any additional domestic or external shocks.
Fitch assumes moderate slippage from Troika fiscal targets in the medium term, especially in 2016 when the primary balance is expected under the programme to improve significantly.

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