S&P upgrades Cyprus’ credit rating to BBB | Stockwatch

Rating agency Standard and Poor’s (S&Ps) on Friday upgraded Cyprus’ long-term credit rating by one notch to BBB, from BBB to a stable outlook, citing the economy’s resilience to external shocks and solid economic prospects.

“The upgrade reflects the relatively strong performance of the Cypriot economy over the past decade and we expect this to continue, despite the effects of the war in Ukraine,” S&Ps said in a ratings action. published Friday evening.

The agency said the stable outlook “offsets the risks that the effects of the war in Ukraine will significantly weaken the Cypriot economy relative to the diversified structure of the economy and its resilience to external shocks, alongside our expectation that the government’s fiscal position will continue to improve.”

S&Ps also raised its forecast for economic growth in 2002 to 4.5% from its previous projection of 2.7%, expecting levels of economic wealth to rise sharply through 2025, supported by demand. strong domestic market and the ongoing recovery in the tourism sector.

“We expect solid economic growth, resilient to heightened risks and strongly supported by the EU FRR disbursement of €1.2 billion over the period 2021-2026,” the agency noted.

According to the agency, Cyprus’ diversified economy proved relatively resilient to pandemic-related restrictions in 2020, contracting by 5%. It rebounded strongly in 2021, with real GDP growth reaching 5.5%. “We expect the economy to grow strongly by 4.5% in 2022, even taking into account Cyprus’ relatively strong ties with Russia, particularly in the tourism and business services sectors, which account for respectively about 14% and 11% of the Cypriot GDP”. adds the agency.

It also notes that “although Cyprus is vulnerable to fluctuations in oil prices, it does not import gas from Russia and is not exposed to the direct impact of supply disruptions experienced by the rest of the Europe”.

Also, on government debt, S&P’s said it expects general government debt to “decline sharply through 2025 on the back of fiscal consolidation and buoyant economic activity.”

“The government’s debt profile is also favourable, with an average maturity of around eight years from May 2022,” the agency said, noting that “the government holds significant cash reserves, equivalent to at minus nine months of government funding requirements, significantly reducing short-term refinancing risk.

However, the agency noted that ratings remain constrained by high stocks of public and private debt and the still high proportion of NPEs in the banking system, despite a sharp drop since the crisis to around 11% of total loans in May 2022.

“While the stock of Cyprus’ problem assets in the banking sector has declined significantly over the past four years, mainly due to asset market sales by the country’s two largest banks, it remains significant compared to those European banks, i.e. around 11% of gross loans at the end of May 2022 compared to 18% a year earlier”, added S&P.

He also warned that while the effect of the pandemic on NPEs has been limited, “we expect the bulk of Phase 2 loans (about 15% of the total compared to an average of 9% in the EU), combined with high concentration in the still recovering tourism sector (10%) could lead to some deterioration in asset quality”, while “the current economic environment will likely delay significant improvements in asset quality. assets “.

The agency said it could further improve Cyprus’ sovereign ratings following improved stability in the financial system, as evidenced by further declines in non-performing exposures (NPEs) on the banking sector’s balance sheet, which could reduce the sector’s contingent liabilities to the government, enhance the effectiveness of monetary policy transmission, and improve banks’ access to debt capital markets.

“Ratings downgrades could emerge if the effects of the war lead to a materially weaker economic growth outlook or if fiscal consolidation slows significantly from our forecast, threatening the pace of public debt reduction,” S&P added. .