DBRS Morningstar upgraded the Republic of Cyprus’ sovereign credit rating on Friday from BBB (low) to BBB, and changed the trend from Positive to Stable.
It stated that the rating upgrade reflects “Cyprus’ stronger-than-anticipated economic and public finance performance during 2021 and DBRS Morningstar’s expectation that medium-term conditions remain supportive of Cyprus’ debt reduction efforts, despite risks posed by Russia’s invasion of Ukraine and the pandemic.”
The Canada-based agency noted that “the Cypriot economy exceeded its pre-pandemic real gross domestic product level during 2021, in spite of the only partial recovery of the tourism sector. The fiscal repair has progressed much faster than anticipated in 2021, with the fiscal deficit falling to 1.8% of GDP from 5.6% of GDP in 2020, mainly driven by strong revenue growth.”
It went on to stress that “Cyprus returned to a small primary surplus of 0.1% of GDP in 2021. In this context, Cyprus’ elevated public debt ratio decreased from 115% of GDP in 2020 to 103.9% of GDP in 2021. Furthermore, the banking system’s continued nonperforming exposures (NPEs) reduction and limited impact from the pandemic on asset quality are supportive factors for the upgrade.”
As for the change to Cyprus’ outlook to Stable, it reflects DBRS Morningstar’s view “that the risks remain broadly balanced. Cyprus is one of the European Union countries most heavily exposed to the Russian market and therefore uncertainty over the duration of the invasion and its impact on longer-term fiscal and debt metrics raises uncertainty. However, DBRS Morningstar considers that the impact on credit metrics will most likely be contained.”
“DBRS Morningstar expects some direct and indirect negative impacts on Cyprus’ economy from Russia’s invasion of Ukraine on economic growth in 2022, given a high exposure to Russia, especially in the tourism and professional services sectors where recovery will be slower than expected. Also, increasing energy prices will exacerbate the already elevated inflationary pressures and further erode household’s purchasing power.”
Nevertheless, DBRS Morningstar “takes the view that Cyprus’ medium-term economic prospects remain solid and the country should be well placed to manage and adjust to the shock,” it said.