O rating agency Fitch upgraded the long-term credit rating of Cyprus by one notch to "BBB" from "BBB-" with a fixed perspective.
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%.
Parallel to 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, surpassing 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 IT and communications 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 from deficit 1 .7% of GDP in 2021 to turn into a surplus of 2.3% of GDP, "much higher" from his estimates last September for a small budget deficit.
As he reports, government spending fell sharply after the end of the pandemic support measures, while revenues grew at a rate higher than nominal GDP. "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.
Besides, the house estimates that the Cypriot authorities will maintain a significant cash reserve in accordance with the "prudent" debt management strategy and will regularly issue bonds in order to partially cover its upcoming debt repayments. He notes that Cypriot bond yields have increased significantly, but the average cost of Cypriot debt will increase at a much slower rate due to the average duration being just under 7.5 years.
Finally the house notes that the overall trend in improving banking sector asset quality has been resilient to exogenous shocks to the economy, with the NPL ratio falling to 10.5% in October 2022 from 11.7% in January and 28% before the start of the Covid-19 pandemic.
Ministry of Finance announcement, Maki Keravnou:
The Ministry of Finance wishes to announce that, on March 10, 2023, the rating agency Fitch issued a statement through which it upgraded the rating of the Republic of Cyprus from BBB- with a stable outlook to BBB with a stable outlook.
This decision according to Fitch is based on the following main factors in 2022:
a) The very good fiscal performance of the state and the larger than expected surplus
b) The ongoing course of reduction of the public debt
c) The resistance of the economy to external macroeconomic shocks
d) The improvement of the quality of the banks' assets
Fitch defines the following as the main factors that will influence the future course of the Republic's rating:
a) The state of the banking sector
b) The economy's resistance to external shocks< /p>
c) Performance in public finances
In general, Fitch has positively assessed not only the fiscal performance in the period 2021-2022 but also the continued resilience of the economy in the various international crises that have occurred in recent years. The ongoing effort to reduce non-performing loans that continued during the pandemic and the effort to strengthen the banking sector has also begun to bear fruit.
In summary, Fitch's announcement contains many positive points for the Cypriot economy despite the problems created by the broader geopolitical conditions and recognizes its resilience and the ability of the Cypriot economy to cope with the challenges presented. The continued improvement of the state's fiscal position and the continued consolidation of the banking sector are the two areas which are critical to securing further upgrades.
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