DBRS con­firms Cyprus at B (low), ‘sta­ble’ trend

Financial Mirror (Cyprus) - - FRONT PAGE -

DBRS, Inc. has con­firmed the long-term for­eign and lo­cal cur­rency is­suer rat­ings for the Repub­lic of Cyprus at B (low), with the short-term for­eign and lo­cal cur­rency is­suer rat­ings con­firmed at R-5 and the trend on all rat­ings re­main­ing ‘sta­ble’.

The rat­ing agency said that “near-term de­fault risks re­main con­tained due to strong im­ple­men­ta­tion of the troika sup­ported adjustment pro­gramme. Cypriot au­thor­i­ties have demon­strated a strong com­mit­ment to the pro­gramme, and eco­nomic and fis­cal per­for­mance has ex­ceeded ex­pec­ta­tions. Nonethe­less, at B (low), the rat­ing un­der­scores the depth of Cyprus’ chal­lenges and heavy re­liance on EU fund­ing.”

DBRS cau­tioned that “high pub­lic sec­tor debt com­bined with el­e­vated real in­ter­est rates raises sig­nif­i­cant ques­tions re­gard­ing debt sus­tain­abil­ity. The process of delever­ag­ing across the pub­lic, cor­po­rate and house­hold sec­tors could be pro­longed, leav­ing the eco­nomic re­cov­ery heav­ily re­liant on ex­ter­nal de­vel­op­ments.

Mean­while, de­lays in the res­o­lu­tion of non­per­form­ing loans (NPLs) could re­duce re­cov­ery val­ues and add to the ul­ti­mate cost of bank re­struc­tur­ing.”

The rat­ing agency said that an up­grade would come from a “timely com­ple­tion of up­com­ing pro­gramme reviews, com­bined with con­tin­ued strong eco­nomic and fis­cal per­for­mance could lead to an up­grade. Fur­ther ac­tion to strengthen Cyprus’ in­sol­vency frame­work and aid the res­o­lu­tion of NPLs would also lend support to the rat­ing. On the other hand, a pro­longed pe­riod of stag­na­tion, par­tic­u­larly if com­bined with fis­cal pol­icy slip­pages or ad­di­tional bank res­cue costs, could re­sult in down­ward pres­sure on the rat­ings.”

Ex­ter­nal fac­tors, in­clud­ing po­lit­i­cal de­vel­op­ments be­tween Cyprus and Turkey and be­tween the EU and Rus­sia, could also have an im­pact on Cyprus’ cred­it­wor­thi­ness, it said.

Re­gard­ing the 10 bln euro bailout, DBRS said that “given the Repub­lic’s strong per­for­mance un­der the troika pro­gramme thus far, EU part­ners may be will­ing to pro­vide ad­di­tional fi­nanc­ing to Cyprus should the need arise.”

Although the lower-tax ad­van­tages and the ser­vices sec­tor are not unique and could be eroded by ex­ter­nal com­peti­tors or by reg­u­la­tory changes in cred­i­tor coun­tries, DBRS ex­pects the business ser­vices sec­tor to re­main an im­por­tant source of em­ploy­ment and in­come for the Cypriot econ­omy.

Tourism, it said, will re­main highly sea­sonal and vul­ner­a­ble to eco­nomic down­turns, but fo­cused and prag­matic pub­lic and pri­vate sec­tor ef­forts to ex­pand the is­land’s ap­peal could gen­er­ate long-term ben­e­fits.

The ar­tign agency noted that within the next decade, ex­ploita­tion of off­shore nat­u­ral gas de­posits should pro­vide a ma­jor new source of in­come. The gov­ern­ment es­ti­mates that cur­rent proven re­serves are likely to bring in net rev­enue of close to EUR 20 bln over the next 20 years (over 110% of 2013 GDP).

“If man­aged pru­dently, the as­so­ci­ated fi­nan­cial in­flows could help to sig­nif­i­cantly re­duce Cyprus’ vul­ner­a­bil­ity to shocks. In ad­di­tion, re­lated in­vest­ment and lower do­mes­tic en­ergy costs could have an­cil­lary ben­e­fits for the Cypriot econ­omy.

The pace of de­vel­op­ment in the gas sec­tor could nonethe­less be af­fected by re­la­tions with Turkey.”

DBRS said that Cyprus’ near-term chal­lenges in­clude the debt level peak­ing at 115% of GDP next year, and “although fi­nanc­ing re­quire­ments through early 2016 are be­ing met through of­fi­cial fi­nanc­ing and pri­vati­sa­tion rev­enue tar­gets, Cyprus is likely to re­quire sig­nif­i­cant new ex­ter­nal fi­nanc­ing to meet ex­pected debt re­demp­tions after the pro­gramme con­cludes.”

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