Canada-based rating agency DBRS confirmed on Friday the Republic of Cyprus’s Long-Term Foreign and Local Currency – Issuer Ratings at ‘BB (low)’ but shifted the trend to Positive from Stable. DBRS has also confirmed the Short-Term Foreign and Local Currency – Issuer Ratings at R-4 and maintained the Stable trend.
The Positive trend reflects DBRS’s view that Cyprus’s solid fiscal and economic performances are likely to be maintained, leading to the further decline in the government debt-to-gross domestic product ratio.
After better-than-expected results for most of 2017, real GDP growth is now forecast to be 3.7 percent for the full year – compared to a previous forecast of less than 3 percent – and projected at around 3 percent in 2018 and 2019, DBRS said.
Likewise, the forecast for the fiscal surplus has been revised upwards to 1.0% of GDP in 2017 – from 0.2 percent – and rising to be above 1.3 percent over the next two years. As a result of the stronger-than-expected developments and a partial early debt repayment, the government debt ratio is set to fall below 100 percent in 2017, one year earlier than initially estimated in the government’s Stability Program in April.
At the same time, banks’ nonperforming loans (NPLs) continue to decrease. Improvements in DBRS’s building blocks of “Fiscal Management and Policy”, “Debt and Liquidity”, and “Economic Structure and Performance” were the key factors for the trend change.
The ratings reflect Cyprus’s solid fiscal performance achieved over the past few years, as well as its attractiveness as a business services centre and a tourist destination, its eurozone membership – which has ensured financial support – and its enhanced public debt management framework that has reduced debt refinancing risks.
However, the ratings also underline the depth of Cyprus’s challenges, given its still high levels of private and public sector debt, sizable non-performing loans in the banking sector, external imbalances, and the small size of its service-driven economy, which exposes Cyprus to adverse changes in external demand, DBRS warned.