Standard and Poor’s (S&Ps) rating agency on Friday affirmed Cyprus’ long- and short-term sovereign credit ratings at ‘BB-/B’, with a positive outlook, saying it expected the Cypriot economy to continue to grow at more than 2% in real terms over 2016-2019, while strengthening its budgetary position and reducing government debt.
The rating agency said that the financial sector’s high level of nonperforming loans (NPLs) remains the key concern for financial stability and economic performance.
“Following the conclusion of European Stability Mechanism/International Monetary Fund-financed economic adjustment programme in March, we expect the Cypriot economy will continue to grow at more than 2% in real terms over 2016-2019, despite high levels of NPLs remaining a key concern for financial stability and economic performance” S&P said in an announcement.
The rating agency said it expected unemployment to decline further to below 13% by 2018, which will support consumption.
It also said that it considered “the possibility of a reunification of the island, which would represent an important positive contribution to the country’s growth rate, even if it presented initial fiscal and external challenges”.
“Last year’s budgetary outcome includes several deficit-increasing one-off items, and as a result of this as well as solid economic growth more than offsetting the removal of public wages and pension freezes, we expect Cyprus’ budgetary position will improve and post surpluses over the forecast period,” S&P said.
Moreover, the rating agency said that ahead of parliamentary elections in May, it did not expect the government to continue with discretionary deficit-reducing measures, but that the government’s budgetary position will benefit from a gradual reduction in unemployment benefits and an increase in cyclical revenue items against the background of continuous economic recovery.
S&P projected that net general government debt will decline below 80% of GDP by 2019 and that general government interest payments will average about 6.3% of general government revenues during 2016-2019.
“Following the conclusion of the IMF/ESM-financed programme earlier this month, we believe that potential loss of eligibility for the European Central Bank’s public sector purchase programme will not impair the sovereign’s access to funding in the financial market,” the rating agency noted.
It said that “financial stability remains a key risk” warning that “given the high level of the NPLs, more resolute measures may be needed to improve the banking system’s asset quality”.
“The positive outlook reflects our view that we could raise the ratings this year should economic recovery exceed our projections in real and nominal terms. We could also raise the ratings should Cypriot banks accelerate progress in reducing currently high levels of NPLs on their balance sheet. This, in our opinion, would lead us to assess that Cyprus’ credit and monetary conditions were converging with those of the Eurozone” it noted.
S&Ps said that they could lower the ratings if banking sector stability comes under renewed significant pressure, for example due to unaddressed deterioration in asset quality or if budgetary performance falls short of reducing government debt in line with our current forecast.
Cyprus is the fourth euro area member state to exit its bailout following Ireland, Spain and Portugal. It used EUR 7.25 bln of the total 10 bln earmarked in the financial bailout.
