STANDARD & Poor’s upgraded its assessment of Cyprus on Friday to ‘BB+’ from ‘BB’, with a stable outlook.
At the same time, it affirmed its ‘B’ foreign and local currency short-term sovereign credit ratings.
S&P said that it expected the Cypriot economy will expand by about 2.7% this year and maintain average annual growth at just under 2.5% between 2018-2020.
“We think that the sovereign’s budgetary position will on average show a small surplus over 2018-2020, driving a discernible decline in government debt” it said.
“We are therefore raising our long-term sovereign credit ratings on Cyprus to ‘BB+’ from ‘BB’ and affirming our ‘B’ short-term rating. The stable outlook balances our view of Cyprus’ fiscal and economic progress against unusually high levels of nonperforming loans in its financial sector, alongside risks of weaker reform delivery ahead of next year’s presidential elections” the rating agency noted.
It explained that the upgrade reflected its views of Cyprus’ stronger-than-expected economic growth and fiscal progress. “Under our projections, general government debt will continue to decline even as the private sector deleverages. We estimate that net general government debt will drop to below 90% of GDP by the end of 2018 versus slightly under 100% of GDP at end-2015” it said.
S&P estimates that after expanding 2.8% last year, Cyprus’ economy will continue to post solid GDP growth of between 2.0% and 3.0% over its forecast horizon and that the unemployment rate, 13.3% at year-end 2016, will fall below 12.0% by 2018.
In the light of Cyprus’ strong economic performance and previous budgetary consolidation efforts, the rating agency estimates the government’s budgetary position to have ended in a small surplus (0.1% of GDP) in 2016, outperforming its own target by 0.4 percentage points.
“Instead, we anticipate the government’s budgetary position will continue strengthening thanks to a gradual reduction in unemployment benefits and an increase in cyclical revenue items amid the economic recovery. The upcoming 2018 elections could, in our view, prompt a loosening of the fiscal stance toward the end of 2017. Still, we do not expect any pronounced negative deviation from the budget balance and see a rise of the budget surplus over the forecast horizon” S&P said.
It noted that the stable outlook balances its view of the upside rating potential due to improvement in economic and budgetary performance and reduction of currently high levels of NPLs against the risk of weaker growth, risks to banking sector stability and budgetary policy deviation.