Cyprus hails Moody’s economy upgrade

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The Finance Ministry welcomed Moody’s acknowledgement the Cyprus economy was resilient and had the potential to overcome the challenges.

The ministry issued a statement following Moody’s decision to change the outlook on Cyprus’ Ba1 ratings to positive from stable while affirming the long-term foreign-currency and local-currency issuer and the local-currency senior unsecured ratings at Ba1.

It said this underlines the continuous growth of Cyprus’ fiscal situation, and the clean-up of the banking sector will lead to future upgrades.

The ministry believes the upgrade is due to the strong reduction in Cyprus’ public debt ratio this year, the stronger-than-expected economic resilience to Russia’s invasion of Ukraine and the pandemic, coupled with solid medium-term GDP growth prospects and strengthening of the banking sector, with non-performing exposures declining.

Moody’s said a rating upgrade is possible in the course of 12 months if there is a growth in GDP of 3% in 2022 and 2% in 2023.

It adds that Moody’s announcement has a lot of positive elements given the problems created by the geopolitical developments in the region.

Moody’s also points out that continued evidence of strong economic resilience coupled with high absorption of EU funding and implementation of reforms under the National recovery and resilience plan would also support an upgrade in the future, the ministry’s announcement says.

Its decision to change the outlook on Cyprus to positive reflects the strong reduction in public debt ratio this year which Moody’s expects to continue, following a reduction of more than ten percentage points of GDP last year.

In the first half of the year, real GDP growth was at 6%, among the strongest performances in the euro area, Moody’s notes.

It said the banking sector’s exposure to Russia is limited, in stark contrast to the early 2010s.

The affirmation of the Ba1 ratings reflects a combination of comparatively high economic and institutional strength and relatively high exposure to event risks related to the large size of the banking system.

Continued evidence of strong economic resilience coupled with high absorption of EU funding and reform implementation of reforms under the National recovery and resilience plan would also support an upgrade.

Further improvements in the banking sector, which would reduce the sovereign’s exposure to banking sector risks, would also be rating positive, Moody’s says.

The positive outlook signals that the rating is unlikely to be downgraded soon.

However, the outlook would likely be returned to stable if Cyprus’ economic performance turned out materially weaker than expected.

A sustained, material deterioration of the government’s fiscal position would also be credit negative, as would a material deterioration of the banking sector’s health.