Moody’s sees Cyprus as ‘potential rising star’

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Moody’s has identified Cyprus as a “potential rising star” to see its rating raised to ‘investment grade’ after 11 years of lingering in junk mode, according to a report released on Monday.

The rating agency cited the island’s significant improvement in the public debt-to-GDP ratio as a key factor in its positive outlook, in its latest report on “fallen angels”.

“Fallen Angels” are states that have seen their sovereign rating drop to the “junk” category, striving to achieve their subsequent return to investment grade.

Cyprus was one of just two countries to be dubbed as “potential rising stars” in the upgrade zone in the investment category, along with Paraguay.

“Potential rising stars” are the states for which the agency has a Ba1 credit rating with a positive outlook. The report highlights the progress made by Cyprus in reducing its public debt-to-GDP ratio and the prudent fiscal policy of Paraguay as key drivers of their credit rating upgrades.

Moody’s is the only international agency that maintains Cyprus in the non-investment grade.

Cyprus had been downgraded to junk in March 2012 with Moody’s upgraded Cyprus’ credit rating to Ba1 in July 2021, an assessment that was further confirmed on August 19, 2022, with the agency assigning a ‘positive’ outlook from ‘stable’.

This had brought Cyprus just below investment grade.

The agency chose not to issue an appraisal act on March 31, 2023, a date that, based on European regulation (CRA3), it had announced as a potential appraisal date. The next potential rating release is set for September 29.

Significant transformation

In Monday’s report, Moody’s stressed that states that saw their credit rating return to the investment category demonstrated significant transformation, including institutional improvements, strengthened public finances, and prospects for higher sustainable growth.

As the rating agency noted, 28 countries have become fallen angels since 1995. Of those, only 12 managed to claw back investment-grade ratings, needing between three to 14 years to do so.

In early 2013, the agency further downgraded the island’s creditworthiness to Caa3, which is considered an extremely speculative category, a few months before the agreement to save the Cypriot economy with the bailout package from the EU and the International Monetary Fund (IMF).

Meanwhile, the remaining of international rating agencies recognised by the European Central Bank (ECB) have already upgraded the Cypriot bond to the investment category for almost five years now.

Standard and Poor’s upgraded the rating to BBB- in September 2018, Fitch in October 2018, DBRS MorningStar in November 2018 and Capital Intelligence affirmed its BBB last month. The current rating of all agencies is one notch above the investment grade threshold.