Fitch reaffirms Cyprus rating

Fitch reaffirmed the Republic of Cyprus's long-term local and foreign currency Issuer Default Rating (IDR) at 'AA-' and the short-term foreign currency IDR at 'F1+'. The country ceiling was affirmed at 'AAA', whilst the outlook on the long-term IDRs remained stable.
Fitch said the Cypriot economy withstood the recession relatively well and its public finances, though weakened, remain in reasonable shape. GDP fell 1.7% in 2009 – amongst the smallest declines in the 'AA' category or in the EU – and is expected to be broadly flat this year. The fiscal deficit in 2009 widened to 6.1% of GDP, better than comparable EU countries such as Portugal and Spain, and gross debt remains below 60% of GDP.
Nevertheless, Fitch argues that there are weaknesses that could pose a longer-term threat to Cyprus's creditworthiness. In particular the banking sector is exposed to the difficulties of Greece, which has been downgraded several times in the past year and remains on negative outlook, while household indebtedness is among the highest in the EU after strong credit growth in 2007 and 2008.
The banks are also exposed to construction and real estate risks and NPLs are rising. In addition, the banks hold large FX (non-euro) deposits, mainly from Russia and the CIS. However, the adverse impact of a sudden withdrawal is mitigated by the 70% liquid assets requirement for Cypriot banks.
Fitch Ratings also highlighted the weakness of the Cyprus ‘twin fiscal and current account deficits – a cause for concern if they deteriorate further.
There are downside risks to the fiscal outlook due to the uncertain strength of recovery and the high volatility of government revenue, the rating agency said. On the positive side, the current account deficit narrowed sharply to 8.1% of GDP in 2009. The large trade and current account deficits meanwhile raise concerns about Cyprus's long-term competitiveness.