Fitch confirms Cyprus at ‘BBB-‘; Outlook Stable
Fitch Rating Agency confirmed Cyprus’s Long-Term Foreign-Currency Issuer Default Rating (“IDR”) at ‘BBB-‘ with a Stable Outlook.
According to Fitch one of the key rating drivers is that the COVID-19 pandemic has led to a deep recession of the Cypriot economy in 2020, similar to many other countries. GDP contracted by 11.6% qoq in 2Q20 following a 2.1% fall in 1Q20. Tourism was the hardest hit, with tourist arrivals being more than 80% lower in January-August 2020 compared to a year ago, whilst domestic demand rebounded due to the low infection rates and limited lockdown measures.
Fitch forecasted a 6% GDP contraction in 2020 followed by a 4% rebound in 2021 and 2.7% growth in 2022 based on positive qoq growth rates from 3Q20 onwards. The forecast indicates that the level of GDP will be 2pp lower in 2021 than the pre-crisis level.
The impact of the pandemic on the labour market was relatively moderate partly due the government support measures and seasonal foreign workers in industries like tourism.
An estimated budget deficit of around 5% of GDP in 2020, as opposed to 3% of GDP in 2019, is expected as a result of the fiscal benefits introduced in response to the pandemic and the decline in revenue due to the economic fall-out.
The budget deficit for January-July was EUR931 million in 2020, compared with a surplus of EUR386 million in the same period in 2019. This indicates a EUR1.3 billion detariation in the fiscal balance, approximately 6% of the annual GDP. The government estimates that the full year cost of all fiscal measures will add up to 4.5% of the GDP.
The gross general government debt (GGGD) to GDP ratio to increase to 113% of GDP in 2020, compared with 95% in 2019 and a previous peak of 109% of GDP in 2014, and well above the current ‘BBB’ median of 36%. The declining trend of the GGGD/GDP will continue in 2021 and debt will fall close to 100% of GDP by 2024.
The banking sector remains a weakness mostly due to the weak asset quality, very high non performing exposures (“NPE”) ratios affecting capital and profitability.
The total balance sheet of the banking sector was EUR58 billion in June 2020, almost unchanged since the end of 2018. At the same time the NPE stock was EUR5.7 billion at the end of 1H20 as it declined by EUR2.3 billion due to asset sales and write-offs by the two largest banks. The NPE ratios remain among the highest in the EU at 20% of total loans and 28% of GDP.
Fitch predicts that NPEs are expected to increase due to the COVID-19 shock. Almost half of total performing loans in Cyprus are in a moratorium until end-December 2020. The measure will limit the increase of NPEs in the short term and support borrowers’ liquidity in 2020. However, it is hard to assess how much of these loans will become non-performing.
The Minister of Finance of Cyprus, Constantinos Petrides stated that the Country’s ranking was maintained by the Rating Agency due to Cyprus’ institutional strength as shown by its per capita GDP, its history of solid economic recovery and a prudent fiscal policy employed prior to the pandemic.
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