The Ministry of Finance announcement
Fitch rating agency upgraded the long-term credit rating of Cyprus by one notch to “BBB” from “BBB-” with a stable outlook.
In an evaluation act issued late last night, the house cites the outperformance of public finances in 2022 and economic growth that exceeded its estimates, as well as the significant reduction in the debt-to-GDP ratio. For 2023, the house estimates that the growth rate will rise to 2.1%.
On the occasion of the election of the new President of the Republic, the house notes that it does not expect a substantial change in the broader direction of economic policy under the new administration.
Fitch points out that the Cypriot economy has shown a degree of resilience to external shocks due to the war in Ukraine, with real GDP expanding at a rate of 5.6% in 2022, beating its forecast last September of 4.7% growth.
According to the house, income from tourism reached 90% in 2019, while the loss of tourists from Russia was offset by higher arrivals from the UK, Israel and EU countries. It points out that strong growth in other sectors of the economy, such as information and communication technology, demonstrates a greater diversification of the economy.
In relation to public finances, Fitch notes that these improved significantly last year with the general government balance sheet moving from a deficit of 1.7% of GDP in 2021 to a surplus of 2.3% of GDP, “much higher” than estimates of last September for a small budget deficit.
As he reports, government spending fell sharply after the end of pandemic support measures, while revenues grew at a rate higher than nominal GDP. “The improving trends in public finances more than offset the support measures for businesses and households to deal with the impact of the energy crisis,” the house points out.
For this year, Fitch expects a lower fiscal surplus due to a slowdown in economic activity and the continuation of energy-related support measures, which will lead to lower government revenue growth. The house estimates that the budget surplus will fall to 1.8% of GDP, before improving marginally to 2.0% in 2024.
In terms of growth, Fitch expects a slowdown in economic activity as high inflation erodes real incomes, while rising interest rates dampen demand for loans, affecting consumption and private investment. He notes, however, that the implementation of the funds of the Recovery and Resilience Plan will compensate part of the weakness in private consumption. For the full year the house estimates that the growth rate will decline to 2.1% and accelerate to 2.7% in 2024.
In relation to public debt, Fitch notes that robust nominal GDP growth and a significantly improved fiscal position translated into a sharp decline in public debt to GDP to 86.5% in 2022 from 101.1% in 2021. The house estimates that public debt will decline further over the next two years, falling to 81.3% in 2024 and continuing to decline to around 73% in 2027.
In addition, the house estimates that the Cypriot authorities will maintain a significant cash reserve in line with the “prudent” debt management strategy and will regularly issue bonds in order to partially cover upcoming debt repayments. He notes that Cypriot bond yields have risen significantly, but the average cost of Cypriot debt will increase at a much slower rate due to the average duration of just under 7.5 years.
Finally, the house notes that the general tendency to improve the quality of the assets of the banking sector was resistant to exogenous shocks in the economy, with the NED index declining to 10.5% in October 2022 from 11.7% in January and 28% before the start of the Covid-19 pandemic.
Ministry of Finance: The house recognizes the resilience of the Cypriot economy
The upgrade of the credit rating by Fitch recognizes its resilience and the ability of the Cypriot economy to cope with the challenges presented, reports the Ministry of Finance on the occasion of yesterday's upgrade of the Cypriot bond by the international rating agency.
The Ministry of Finance underlines that “the continued improvement of the state's fiscal position and the continued consolidation of the banking sector are the two areas that are critical to securing additional upgrades”.
According to the Ministry of Finance, the upgrade is based to the very good fiscal performance of the state and the larger than expected surplus, the continued course of reduction of the public debt, the resistance of the economy to external macroeconomic shocks and the improvement of the quality of the banks' assets.
“In general, the Fitch have positively assessed not only the fiscal performance in the period 2021-2022 but also the continued resilience of the economy to the various international crises that have occurred in recent years”, reports the Ministry of Finance, adding that the ongoing effort to reduce non-performing loans that continued during period of the pandemic and the effort to strengthen the banking sector has also begun a bears fruit.