S&P issues upgrade, warns about NPLs and privatisations
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.