Fitch up­grades Cyprus on bet­ter pub­lic fi­nances

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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