According to Fitch, the growth rate will be 2.8% in 2024.
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Rating agency Fitch has confirmed Cyprus' long-term credit rating at BBB, maintaining a stable outlook, estimating that fiscal surpluses will continue, despite the slowdown in economic growth, and that the downward trend in public debt will continue, albeit at a slower pace.
The house slightly upgraded its forecast for the growth rate this year to 2.5% (from 2.1% in March), while it estimates that the growth rate in 2024 will be 2.88%. It is recalled that in March this year the house had upgraded the Cypriot bond to BBB, two notches above the limit of the investment category.
Regarding public finances, the house estimates that the balance of the general government will remain in surplus in the next two years, despite the implementation of some measures to deal with the increased cost of living, such as the increase of the ATA for the public sector to 66.7% from 50% of last year's inflation. Fitch estimates the fiscal impact will rise to 0.1% of GDP this year and 0.3% in 2024.
We expect the fiscal surplus to decline from 2.1% last year to 1.7% this year and remain essentially unchanged at 1.8% in 2024, Fitch notes, adding however that risk to the forecasts for the path of public finances comes from the potential impact of the rent versus installment plan, although the terms of the plan suggest that the impact on the public purse will be limited.
Regarding public debt, the house believes that the downward trend will continue, albeit at a slower pace than in 2022 when the debt-to-GDP ratio fell by 15 percentage points, driven by the surplus and double-digit nominal growth GDP.
“We forecast a continued, albeit slower, decline in the debt-to-GDP ratio to 80.9% this year and 73.2% in 2014,” the house says, adding that this figure is significantly higher than the BBB rating average of 56%.
Fitch believes that the Cypriot authorities will maintain a significant cash reserve and regularly issue bonds to cover upcoming debt maturities. It also estimates that although Cypriot debt yields remain high, debt servicing costs will rise at a moderate pace with the average cost of debt increasing from 1.7% in 2022 to 2.1% in 2024.
In terms of economic growth, the house notes the resilience demonstrated by the Cypriot economy in 2022, which recorded a growth rate of 5.6% despite a sharp rise in prices, the war in Ukraine and the impact of sanctions on Russia, which had important connection with Cyprus.
It predicts that in 2023 the growth rate will slow to 2.5%, a rate that is however higher than the previous estimate of 2.1% last March. According to Fitch, growth will slow due to domestic demand constrained by rising interest rates and the impact of still high prices on real incomes.
According to Fitch, the pace of growth will be 2.8% in 2024.
For the banking system, Fitch notes that asset quality has continued to improve, with the non-performing loan ratio falling to 9.3% last March, compared to 11.4% in the corresponding period last year. It notes that the proportion of loans in stage 2 of the IFRS 9 standard, which records loans with significant credit deterioration, remained stable at 12%, suggesting that there has not been a large inflow of new bad loans.
It also notes the improvement of bank solvency, driven by increased profitability in a higher interest rate environment, with the Tier 1 Equity Index rising to 17.7% at the end of 2022 compared to 17.1% a year earlier.
Finally, the house expects the current account deficit to narrow to 5.8% of GDP by 2024, after widening significantly in 2022 to 9.1% due to high imported fuel prices and strong domestic demand.
