S&P raises out­look to ‘pos­i­tive’

Financial Mirror (Cyprus) - - FRONT PAGE -

Stan­dard and Poor’s (S&Ps) has re­vised the Cypriot econ­omy’s out­look to ‘pos­i­tive’ from ‘sta­ble’, main­tain­ing the econ­omy’s “B+/B” rat­ing based on a faster than ex­pected re­duc­tion of the gen­eral gov­ern­ment debt, sup­ported by less ad­verse eco­nomic growth prospects than be­fore.

The gov­ern­ment wel­comed the S&P de­ci­sion with Deputy Gov­ern­ment Spokesman Vic­tor Papadopoulos say­ing on Satur­day that “it is im­por­tant for the out­look of the Cypriot econ­omy to be rated as pos­i­tive by the par­tic­u­larly strict rat­ing agen­cies that are also im­por­tant for the in­ter­na­tional mar­kets.”

He said that “it is the duty of all of us not only to safe­guard this pos­i­tive out­look but also to strengthen it, col­lec­tively and re­spon­si­bly.”

The rat­ing agency es­ti­mates that fol­low­ing the EUR 10 bln eco­nomic ad­just­ment pro­gramme con­cluded with the Troika of in­ter­na­tional lenders in March 2013, the Cypriot econ­omy will bot­tom out in 2015 and then slowly strengthen, based on a re­silient busi­ness ser­vices sec­tor, a solid tourism sec­tor, and grad­u­ally re­cov­er­ing pri­vate con­sump­tion.

How­ever, S&P warns that “in­vest­ment growth will re­main neg­a­tive, as the process of delever­ag­ing by do­mes­tic banks con­tin­ues.”

S&Ps es­ti­mates that the gen­eral gov­ern­ment po­si­tion was at close to bal­ance in 2014 (-0.3% of GDP), ex­clud­ing sta­tis­ti­cal ac­count­ing for the costs re­lated to the re­cap­i­tal­i­sa­tion of the co­op­er­a­tive bank­ing sec­tor, which all im­plies a sub­stan­tial bud­getary im­prove­ment.

“As a re­sult of the gov­ern­ment’s past and ex­pected bud­get deficit re­duc­tions and a grad­ual re­cov­ery in eco­nomic growth over 2015-2017, we ex­pect the gen­eral gov­ern­ment bal­ance will av­er­age about -0.7% of GDP over 2015-2017, com­pared with our pre­vi­ous pro­jec­tion of -2.4% of GDP,” the agency said.

Ac­knowl­edg­ing that its pro­jec­tions are sub­ject to un­cer­tainty, due to var­i­ous po­ten­tial shocks to Cyprus’ small, open, ser­vices-based econ­omy, the agency notes that the econ­omy will begin grow­ing again in 2015, for the first time since 2011.

S&P’s cites the de­pre­ci­a­tion of the Rus­sian rou­ble and the ex­pected con­trac­tion of the Rus­sian econ­omy, along­side the EU sanc­tions im­posed on sev­eral large Rus­sian com­mer­cial banks and com­pa­nies, as the fac­tors which may weigh on the prospects in key sec­tors, in­clud­ing tourism and busi­ness ser­vices.

“Still, de­spite an es­ti­mated 4% decline in nom­i­nal GDP growth last year, Cyprus’ bud­get deficit nar­rowed by nearly two per­cent­age points of GDP to about 3% of GDP, to be­low the out­comes we ex­pected for many eu­ro­zone economies that saw pos­i­tive growth,” the agency added.

S&P said that fi­nan­cial sta­bil­ity con­tin­ues to re­main a key risk as the banks’ as­set qual­ity de­te­ri­o­ra­tion con­tinue and non-per­form­ing loans (NPLs) amount to al­most 55% of to­tal as­sets in Novem­ber 2014.

“Although the new leg­is­la­tion re­gard­ing fore­clo­sures and in­sol­vency pro­ce­dures adopted this year could im­prove con­di­tions, the out­come is still un­cer­tain,” S&P said, adding that “we con­tinue to con­sider that the eco­nomic ad­just­ment pro­gram’s EUR 1 bln fi­nan­cial sec­tor sup­port buf­fer pro­vides the gov­ern­ment with lee­way to ad­dress fi­nan­cial sec­tor sta­bil­ity risk.”

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