COVID19: Fitch changes Cyprus outlook over virus impact

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Fitch rating agency has changed the outlook for Cyprus from positive to stable, citing the impact of the coronavirus pandemic on its economy and Nicosia’s fiscal position.

In a rating action issued on Friday, Fitch affirmed Cyprus’ Long term rating at ‘BBB-‘.

“The outlook revision reflects the significant impact of the global COVID-19 pandemic on Cyprus` economy and on the sovereign`s fiscal position,” Fitch said.

It forecasts a GDP contraction of more than 2% in 2020 “reflecting the material negative impact of the health crisis on the global economy.”

“Risks to this baseline forecast are tilted firmly to the downside, as it assumes that the coronavirus can be contained in 2H20, leading to a relatively strong economic recovery in 2021.”

“In the event of a second wave of infections and the widespread resumption of lockdown measures, economic outturns would be significantly weaker for 2020 and 2021,” Fitch said.

According to Fitch, the recession and the economic policy response to the COVID-19 pandemic will result in a sizeable deterioration of the budget balance this year.

It said the government’s fiscal easing, including extra healthcare expenditure, lower social security contributions and subsidies for job protection will lead to a budget deficit of around 1% of GDP in 2020 compared with the 2.8% of GDP budget surplus in 2019.

Fitch said that despite favourable trends in the gross general government debt (GGGD) to GDP ratio which amounted to 95.5% in 2019, the GGGD to GDP ratio will increase in 2020 due to the combination of the economic recession and budget deficit.

“Moreover, the risk of materialisation of contingent liabilities into the sovereign balance sheet remains a risk, given the financial system’s still fragile position and downside risks to the economic outlook.”

According to Fitch, the Cypriot economy`s demonstrated flexibility, illustrated for example by the fall in unemployment to close to pre-crisis levels,  will drive the recovery after the severe short-term shock.

But it pointed out that “the GDP growth forecast is highly uncertain in 2021, but afterwards it is expected that the GDP growth will gradually converge to 2% medium-term growth potential, unchanged since the last rating review.”

Fitch noted that the government has built a track record of capital markets access with increasingly favourable yields, pointing out however that “financing needs in 2020 could increase further depending on the extent of the fiscal impact of the health crisis.”

It said the banking sector “remains a weakness relative to `BBB` peers due to the exceptionally weak asset quality and high NPE ratios that still weigh on capital, in particular, capital at risk from unreserved problem assets, and profitability.”

Nicosia satisfied

Nicosia said Fitch’s outlook highlights the government’s responsible management both of the economy and public finances during the coronavirus pandemic.

“Fitch rating agency’s announcement maintaining the Republic of Cyprus credit rating under these adverse conditions, even with a stable outlook, shows that the government’s responsible management of the economy and of public finances remains the key to safeguarding macroeconomic stability,” the Finance Ministry said on Saturday.

“In these particularly difficult conditions in the global economy and international markets due to the coronavirus pandemic crisis and the economic challenges we are called on to face the Finance Ministry remains focused on maintaining the Cypriot economy’s credibility to the maximum extent and on maintaining jobs and supporting the economy,” it added.