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Nicosia heralds Fitch upgrade

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The upgrading of Cyprus’ long-term credit rating by one notch with a stable outlook citing outperformance of fiscal balance and growth rate, is an important development, said President Nikos Christodoulides.

He credited the previous government for all the work that had been done, leading to this positive result.

“Fiscal discipline is necessary; a strong and reliable economy will allow us to have a targeted social policy”, Christodoulides said.

In its rating action, issued following the presidential elections, the agency said, “we do not expect a substantial change in the broad direction of economic policy under the new administration.”

“The Cypriot economy has shown a degree of resilience to the external shocks brought about by the war in Ukraine.”

Fitch pointed out that real GDP expanded by 5.6% in 2022, above its forecast of 4.7%.

The rating agency upgraded Cyprus’ long-term credit rating by one notch to ‘BBB’ as the Cypriot economy showed resilience from the external shock caused by the war in Ukraine.

The Finance Ministry said the agency evaluates “the positive fiscal performance of Cyprus in 2021 – 2022 but also the continued resilience of the economy to the various international crisis that emerged.”

“The continued improvement of the state’s fiscal position and the continued consolidation of the banking sector are two sectors crucial to achieving further upgrades,” the Ministry added.

Fitch said that tourism expenditure reached above 90% of its 2019 level, despite the absence of tourists from Russia for most of the year, which accounted for almost 20% of tourist arrivals in 2019, a record year for Cypriot tourism.

“But the loss of this market has been mostly offset by higher numbers from the UK, Israel, and EU countries.

“Moreover, strong growth in other sectors of the economy, such as information and communications technology services, points to greater diversification of economic activity.

“Public finances improved significantly last year, with the general government balance turning from a deficit of 1.7% of GDP in 2021 to a surplus of 2.3%, much higher than Fitch’s forecast of a small deficit.”

Fitch expects a lower surplus in 2023 due to the slowdown in economic activity, which will lower revenue growth and continued energy-related support measures, forecasting a reduced fiscal surplus of 1.8% before improving marginally to 2.0% of GDP in 2024.

It said economic activity will decelerate this year “as high inflation erodes real incomes and rising interest rates dampen demand for loans, affecting consumption dynamics and private investment.”

But deployment of Next Generation EU funds should offset some of the weaknesses of private domestic demand.

“Overall, we expect real GDP growth of 2.1% and 2.7% in 2024, as economic activity expands at a faster pace from the middle of this year”.

On Cyprus’ public debt, Fitch noted that strong nominal GDP growth and the much-improved fiscal position “translated to a sharp decline in the government debt to GDP ratio to 86.5%, from 101.1% in 2021.”

“Our projections are consistent with the government debt ratio falling further over the next two years, to 81.3% in 2024.”

Baseline projections assume the debt ratio will continue to decline over the medium term to around 73% in 2027.

The agency also assumes that Cypriot authorities will preserve a sizeable liquid asset buffer, in line with their prudent debt management strategy, and regularly issue bonds to at least partly cover upcoming debt amortisations.

With yields on government debt rising sharply, “the average cost of Cyprus’s public debt will rise much more slowly, given the average maturity of debt of just under 7.5 years.”

Fitch said the overall trend in asset quality improvement in the Cypriot banking sector has been resilient to external shocks to the economy.

Just before the Covid-19 pandemic in January 2020, the non-performing loan (NPL) ratio was 28.0% and declined last year to 10.5% in October from 11.7% in January.

“And NPLs have fallen further, as Cyprus’s two systemic banks completed one and are close to completing a further large sale of NPLs”.