Fitch upgrades Cyprus on better public finances
Rating agencies Fitch and Standard and Poor’s have upgraded Cyprus sovereign ratings based on the improved image the government is projecting with its better management of public finances, while praising the services sector as being a ‘resilient’ factor in th economy’s stability and growth.
Fitch upgraded Cyprus’ outlook to ‘positive’ from ‘stable’ on Friday citing better than expected public finances performance and smaller budget deficits. The agency also affirmed its longterm foreign and local currency Issuer Default Ratings (IDRs) at ‘B-’, as well as the issue ratings on Cyprus’s senior unsecured foreign and local currency bonds at ‘B-’. The Country Ceiling and the Short-term foreign currency IDR have been affirmed at ‘B’. “Developments in public finances continue to materially exceed previous expectations,” Fitch noted, adding that due in part to a shallower recession than previously forecast, the strong budget execution should help narrow the headline fiscal deficit to 3.3% of GDP in 2014, significantly below the 5% projected by Fitch in April.
Noting that Cyprus has implemented
adjustment measures amounting to 6.8% of GDP in 2013 and 2014, Fitch pointed out that “nevertheless, it will still be challenging to meet the over-arching objective of a primary budget surplus of 4% of GDP by 2018, though recent outturns provide some encouragement.”
However, Fitch expects the recession to last longer than assumed under the Troika bailout programme, with the economy projected to shrink by around 0.8% in 2015, compared with EU/IMF projectios for a 0.4% growth in 2015, and return to growth in 2016.
According to Fitch, the general government debt-to-GDP ratio (GGGD) is now expected to peak a year earlier in 2015 and decline more rapidly than under previous forecasts. The agency projects that public debt is expected to peak at 113% of GDP in 2015 (compared with over 126% in the previous review) and to gradually decline to 100% by 2020.
Standard & Poor’s also raised its rating for Cyprus on Friday, with the long-term foreign and local currency sovereign ratings upped to ‘ B+’ from ‘B’, affirming the short-term foreign and local currency ratings at ‘B’ and the outlook ‘stable’.
“Cyprus is strongly committed to its economic adjustment programme,” it said, adding that the economy, especially in the key services sectors, has proved resilient, contracting by less than it had anticipated.
“Cyprus has complied with its economic adjustment programme … that should remain on track even if there are disbursement delays by its official lenders (due to delays in parliament adopting mortgage foreclosure reforms).
Cyprus’ real GDP, S&P estimates, “will likely contract by about 3% in 2014, compared with our previous forecast of 3.8%, based on a robust performance in the tourism sector and a resilient business services sector.”
Investment growth will be held back by domestic banks’ deleveraging, as well as by Cyprus’ weak legal framework for lender protection and the economy’s high credit risk which is exacerbated by high real interest rates and deflationary pressures, all leading to stress on Cyprus’ financial stability.
“If implemented, the proposed foreclosure legislation would, in our view, improve Cypriot banks’ ability to seize collateral on past due loans,” S&P said.