DBRS upgrades Cyprus despite Ukraine war

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Finance Minister Constantinos Petrides is pleased with Cyprus’ recent upgrading by rating agency DBRS Morningstar from BBB(Low) to BBB, revising its outlook from positive to stable.

Petrides said in a statement: “DBRS justifies its decision to upgrade the Republic’s credit rating to BBB, based on the prudent policy of the public debt management, the historically positive performance of the government regarding the ability to reduce the budget deficit”.

The rating agency also noted Cyprus’ inclusion in the eurozone, and its favourable business and investment character also played a role in its decision.

DBRS’s recent upgrade reflects the better-than-expected performance of Cyprus’ public finances in 2021 and the expectation that medium-term conditions will remain supportive in efforts to reduce debt, despite the risks posed by the war in Ukraine and the coronavirus pandemic.

Fiscal recovery progressed faster than expected in 2021, with the budget deficit shrinking to 1.8% of GDP from 5.6% of GDP in 2020, mainly due to strong revenue growth.

DBRS notes that Cyprus recorded a small primary surplus of 0.1% of GDP in 2021.

In this context, Cyprus’s increased public debt ratio decreased from 115% of GDP in 2020 to 103.9% in 2021.

The rating agency also mentioned the continuing decline in non-performing loans burdening the banking system and the limited impact of the pandemic on the quality of banks’ assets were supporting factors for the upgrade.

Petrides said: “The government remains firmly committed to strengthening the fiscal position of Cyprus, promoting sustainable recovery and the long-term stability of the Cypriot economy”.

Changing Cyprus’ outlook to Stable, DBRS said it reflects “the risks remain broadly balanced. “Cyprus is one of the European Union countries most heavily exposed to the Russian market. Therefore, uncertainty over the duration of the invasion and its impact on longer-term fiscal and debt metrics raises uncertainty.

“However, DBRS Morningstar considers that the impact on credit metrics will most likely be contained.”

DBRS expects some direct and indirect negative impacts on the economy from Russia’s invasion of Ukraine on economic growth in 2022, “given a high exposure to Russia, especially in the tourism and professional services sectors where recovery will be slower than expected.

“Also, increasing energy prices will exacerbate the already elevated inflationary pressures and further erode household’s purchasing power.”

Nevertheless, it views that “Cyprus’ medium-term economic prospects remain solid, and the country should be well placed to manage and adjust to the shock.”