A spike in Cyprus’ public debt will come down after the coronavirus pandemic eases, but Moody’s said it would consider upgrading the island’s credit rating if the banking sector reduced its toxic loans.
“The credit profile of Cyprus (Ba2 positive) reflects its small but wealthy economy, improved economic resilience and the government`s fiscal outperformance in the wake of the country`s banking crisis,” Moody’s Investors Service said in its annual report.
It noted that Cyprus faces several credit challenges arising from its relatively undiversified economy and high levels of government, non-financial corporate and household debt.
“The coronavirus pandemic will lead to a severe deterioration in the country`s economic activity and fiscal position, and debt is expected to spike this year.”
“We expect that Cyprus’ debt reduction will resume at a sustained pace after the 2020 coronavirus crisis,” said Sarah Carlson, a Moody’s Senior Vice President.
“At this point, we anticipate that the increase in debt related to the coronavirus will be transitory, partly because of Cyprus’ large fiscal surplus going into the pandemic,” she added.
According to the rating agency, the government`s fiscal position will deteriorate significantly this year as coronavirus support measures increase spending and low economic growth weakens revenues.
Although it believes the government`s fiscal position will improve significantly from 2021, and “does not expect a return to sizeable surpluses over the next few years”.
It said medium-term debt trends and banking sector issues will drive the evolution of the Cypriot sovereign rating and outlook.
“Moody`s would consider upgrading the rating if non-performing exposures (NPEs) were to fall substantially and improve the strength of the banking system and reduce contingent liability risk.”
“Further material declines in the debt burden – once the coronavirus crisis wanes – would also put upward pressure on the rating, but only if accompanied by improvements in banking sector risk.”
The agency warned that Cyprus’ credit profile could weaken if growth or fiscal policy decisions were to cause a prolonged reversal of the supportive fundamental debt trend.
“Failure to decrease the stock of NPEs in the banking sector would also be negative. The outlook could move back to stable if Moody`s were to conclude that the coronavirus will have a long-term impact on economic strength and fiscal prospects.”