DBRS Morningstar confirmed on Friday the Republic of Cyprus’ credit rating at BBB (low) and maintained its outlook as stable.
The Canada-based agency stated that the stable trend reflects its view that risks to the ratings are broadly balanced despite the economic contraction in Cyprus in 2020, brought about by the global coronavirus pandemic, and the deterioration in the government’s balance sheet.
The Cypriot economy contracted by a less-than-expected 5.5% year-on-year in the first half of 2020, less severely than the euro area average.
The fiscal surplus is expected to shift to a deficit, with the government debt-to-GDP ratio rising close to a still manageable 115% of GDP in 2020.
DBRS Morningstar said it expects the Cypriot economy to recover from the Covid-19 shock and the increase in the public debt ratio to reverse, although the pace of the economic recovery, particularly that of the tourism sector, is highly uncertain at the moment given the ongoing pandemic.
There is also uncertainty over the impact from the loan repayment moratoria on Cypriot banks from next year.
On the other hand, banks remain well capitalized and have continued to reduce their legacy nonperforming loans in 2020.