S&P is­sues up­grade, warns about NPLs and pri­vati­sa­tions

Financial Mirror (Cyprus) - - FRONT PAGE -

Stan­dard & Poor’s has up­graded its as­sess­ment of Cyprus to BB-, cit­ing re­moval of cap­i­tal con­trols and strong bud­getary per­for­mance.

“While we con­tinue to view the bank­ing sec­tor’s as­set qual­ity as a key con­cern, the coun­try’s eco­nomic and bud­getary per­for­mance ex­ceed our ex­pec­ta­tions. We are there­fore rais­ing our long-term sov­er­eign credit rat­ings on Cyprus to BB- from B+,” the rat­ing agency said on Fri­day.

S&P said the out­look is pos­i­tive and “re­flects that we could raise the rat­ings in the next 12 months if we see con­tin­ued eco­nomic growth and fur­ther sta­bil­i­sa­tion of the fi­nan­cial sec­tor through im­prove­ments in as­set qual­ity and fur­ther re­duc­tion of gov­ern­ment debt”. It noted that it could re­vise the out­look to ‘sta­ble’ if the bank­ing sec­tor’s sta­bil­ity comes un­der re­newed sig­nif­i­cant pres­sure due, for ex­am­ple, to un­ad­dressed de­te­ri­o­ra­tion in as­set qual­ity or if bud­getary per­for­mance falls short of re­duc­ing gov­ern­ment debt in line with their cur­rent forecast.

S&P es­ti­mates that the Cypriot econ­omy, which re­cently ex­ited a re­ces­sion, will grow by about 1.5% in 2015 in real terms and about 2% per year there­after.

It also ex­pects that the un­em­ploy­ment rate, cur­rently above 16%, will de­cline only grad­u­ally over the forecast hori­zon and a gen­eral gov­ern­ment deficit of about 0.6% of GDP in 2015 fol­lowed by a sur­plus for the rest of the forecast pe­riod.

Stan­dard and Poor’s ex­pects Cyprus will be in a pri­mary sur­plus po­si­tion as of this year of at least 2% of GDP and fore­casts av­er­age net gen­eral gov­ern­ment debt over 20152017 at about 90% of GDP.

The rat­ing agency noted that the ex­e­cu­tion of the pri­vati­sa­tion plan would gen­er­ate sale pro­ceeds that could fur­ther re­duce gov­ern­ment debt, adding, how­ever, that “the sale of Cyta or the Elec­tric­ity Au­thor­ity of Cyprus may not be com­pleted be­fore the 2016 elec­tions, given the likely op­po­si­tion by po­lit­i­cal par­ties and trade unions as well as the gov­ern­ment’s ex­ist­ing favourable fund­ing po­si­tion”.

It added that de­te­ri­o­ra­tion in the bank­ing sec­tor’s as­set qual­ity hasn’t peaked yet.

“Although we think that the new leg­is­la­tion re­gard­ing fore­clo­sures and in­sol­vency pro­ce­dures adopted this year, to­gether with a sig­nif­i­cant in­crease in banks’ ca­pac­ity to man­age non­per­form­ing as­sets, could lead to a re­ver­sal in as­set qual­ity trends, we think the out­come is still un­cer­tain”.

It added that given the high level of NPLs, more res­o­lute mea­sures may be needed to im­prove the bank­ing sys­tem’s as­set qual­ity.

Deputy Gov­ern­ment Spokesman Vic­toras Pa­padopou­los said the up­grade “is another im­por­tant de­vel­op­ment that con­firms the restora­tion of Cyprus’ cred­i­bil­ity, but also the pos­i­tive prospects of the Cypriot econ­omy.”

“At the same time it con­firms the fact that the cor­rect path and pru­dent pol­icy fol­lowed dur­ing the last two and a half years should con­tinue” he noted.

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