Excellent news for Cyprus as the Standard & Poor’s Global Ratings raised the island’s long- and short-term foreign and local currency sovereign credit ratings from BB+ to BBB- with a positive outlook.
According to S&P “the Cypriot economy will continue to grow at a solid pace through 2021”. Largely thanks to the government taking measures to reduce the nonperforming assets bulk in the banking system through financial support as well as legislative changes, the situation has improved drastically and is likely to continue the positive trend. The ratings are also supported by the efforts to consolidate public finances and restore the health of the banking sector. The rating agency is hopeful that the banks will further reduce their bad asset load over the medium term while the government’s additional support to the banking sector from now through 2021 will be moderate.
Commenting on the upgrade President Nikos Anastasiades noted that going from financial collapse to investment grade in just 6.5 years was the best confirmation of the correctly chosen strategy that will continue to be adhered to. Finance minister, Harris Georgiades echoed that, saying that one of the most important economic policy objectives has been achieved.
The credit rating company noted that Cyprus’ economy expanded by 3.9% in real terms in 2017, outperforming the 3.3% projection for the year. S&P forecasts the real GDP growth by 2.8% on average over 2018-2021, supported by investment activity and service exports, while private consumption will decelerate as households increase debt servicing
In its statement explaining the upgrade, S&P said that by relieving the Co-op of the bad assets the Cypriot authorities had paved the way for a significant reduction in the banking sector’s nonperforming assets even though it came at a cost of 15 per cent of economic output.
The credit rating agency may consider raising the ratings on Cyprus again if the economic recovery and macroeconomic policy direction will stimulate further considerable debt reduction in government and private sector. They are also expecting to see whether the economy’s external debt will improve further.
However, S&P warned of still remaining vulnerabilities & risks from high levels of private sector debt. Despite solid economic growth, private sector debt is likely to remain high over the medium term, and the increasing concentration of the economy in tourism and construction activities presents another potential risk.
Standard & Poor’s mention that they could revise the outlook to stable if economic growth is significantly lower than their expectations, endangering private debt service and further financial sector improvements, or if the general government debt increases substantially, contrary to all expectations.