Scope revises Cyprus credit outlook to positive

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Scope Ratings affirmed the Republic of Cyprus’ BBB- long-term issuer and senior unsecured local- and foreign-currency ratings, revising the outlook from stable to positive.

According to Scope’s analysis, the decision to revise the outlook reflects the country’s solid growth prospects, supported by long-term improvements in labour market conditions, foreign-financed investment, and structural reform.

It refers to the robust fiscal trajectory, underpinned by Cyprus’s “good consolidation record, renewed commitment to fiscal discipline and strong growth outlook”.

And the continued strengthening of the banking sector through “significant progress in reducing non-performing exposures” was another reason for its decision.

Scope said the Cypriot economy rebounded strongly following the relaxation of containment measures for COVID-19.

Real GDP reached its pre-crisis levels as early as Q3 2021 and grew by 5.5% last year, well above the government’s 2021-24 Stability Programme forecast of 3.6%, while unemployment has dropped to 5.4% in April, the lowest level since 2009.

“The country is facing headwinds in the form of persisting COVID-19 infections and the economic knock-on effects of the war in Ukraine, including rising inflation and the associated tightening of monetary policies globally.

“Cyprus is reliant on trade with Russia as exports to the country represent 8.4% of GDP, mostly through tourism – as Russia accounted for around 20% of tourism arrivals in 2019 – and professional services.”

The short-term economic outlook for Cyprus has thus weakened somewhat, but Scope expects the country to continue its robust recovery with 2% growth in 2022, followed by 2.7% on average over 2023-26.

The government announced a series of financial support measures totalling €300 mln (1.2% of GDP) to offset the impact of the war in Ukraine and the associated inflationary pressures on households.

Scope’s baseline projections see the budget deficit remaining broadly unchanged at around 2% of GDP in 2022.

After that, the budget balance should improve steadily and reach a surplus of 1% of GDP by 2027.

“This view is underpinned by the government’s good record of fiscal discipline.”

Scope expects Cyprus’ public debt to return to pre-pandemic levels by 2024 and reach 75% of GDP by 2027, “one of the strongest reductions among EU countries.”

It said the non-performing exposures (NPE) ratio continued to improve in the wake of the COVID-19 pandemic even after the withdrawal of emergency support measures.

The NPE ratio reached 11% in December 2021, down from 27% in March 2020 and from the 2014 peak of 49%.