Fitch Ratings believes that with public sector debt reaching 110% of GDP this year and later easing off to about 90% by 2022, Cyprus won’t need to cash in on the full EUR 10 bln bailout agreed to in 2013.
“The general government debt to GDP ratio is expected to peak at just over 110% in 2015 and 2016 and will ease to around 90.7% by 2022. The strong budget performance implies the buffers in the programme have grown close to EUR 3 bln (17% of GDP). The underlying trend for public finances has been positive,” the rating agency said, adding that the fiscal deficit in 2014 was 0.2% of GDP (8.8% of GDP including the one-off capital injections to the co-operative sector) compared with Fitch’s forecast of 3.3% in October.
“The over-performance reflects a combination of higher tax revenues and lower than expected expenditure across most items. Fitch expects the fiscal deficits to average 0.8% from 2015 to 2018”.
However it said that the risks to EU-IMF adjustment programme implementation remain elevated and that there is a significant risk that privatisation plans will not be fully implemented, leading to further delays to programme reviews.
Fitch also noted that non-performing loans (NPLs) in the banking sector reached an “exceptionally high” 50%.
The removal of the remaining capital controls in April has led to the Country Ceiling being raised by three notches to ‘BB-’.
The credit rating agency said that it has affirmed Cyprus’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B-’ with a positive outlook.
The issue ratings on Cyprus’s senior unsecured foreign and local currency bonds have also been affirmed at ‘B-’.
The Country Ceiling has been raised to ‘BB-’ from ‘B’ and the short-term foreign currency IDR has been affirmed at ‘B’.
Fitch warned that Cyprus is among the most vulnerable eurozone sovereigns to a disorderly Greek exit, as a country still in the midst of a post-crisis adjustment. Direct linkages between the two economies have been reduced in recent years and are not large, however, the impact on depositor and investor confidence is harder to gauge, it said.
It added that economic conditions in Cyprus remain challenging and the output is projected to decline by 0.8% in 2015, the fourth consecutive year of contraction.
“The passing of the insolvency law through parliament on 18 April should trigger the activation of the foreclosure law and pave the way for further official funding. The law should strengthen the foreclosure framework and address the high banking NPL problem,” the rating agency said.
