Fitch hikes rat­ings 2 notches, closer to non-junk grade

Financial Mirror (Cyprus) - - FRONT PAGE -

Fitch Rat­ings up­graded on Fri­day Cyprus’ long term for­eign and lo­cal cur­rency is­suer de­fault rat­ings (IDRs) by two notches to ‘ B+’ up from ‘B-’ with a pos­i­tive out­look, say­ing that “Cyprus has es­tab­lished a track record of fis­cal con­sol­i­da­tion and over-per­for­mance on its fis­cal tar­gets.”

The rat­ing agency said that Cyprus’ se­nior un­se­cured for­eign and lo­cal cur­rency bonds have also been up­graded to ‘B+’ from ‘B-’ and the coun­try ceil­ing raised to ‘BB+’ from ‘BB-’, while the short-term for­eign cur­rency IDR has been af­firmed at ‘B’.

The rat­ings up­grade is three short of ex­it­ing the ‘junk’ sta­tus, while the Moody’s rat­ing is at B3, or five notches be­low the “non-in­vest­ment grade” and S&P is at BB-, just two notches be­low junk.

All three agen­cies are now ex­pected to raise their rat­ings once again, fol­low­ing this week’s suc­cess­ful is­sue of a EUR 1 bln 10-year EMTN pa­per.

Cyprus pre­vi­ously is­sued a 5-year bond in the sum­mer of 2014 and a 7-year is­sue this year.

In its re­view for the econ­omy, Fitch now projects “a deficit of 1% of GDP for 2015 and sur­pluses of 0.2% and 1% for 2016 and 2017, re­spec­tively.”

At the same time it fore­casts the gen­eral gov­ern­ment gross debt (GGGD) “to peak at less than 108% of GDP this year, be­fore fall­ing to around 100% in 2017”.

This, it pointed out, “com­pares with a peak of over 130% pro­jected by Fitch in June 2013.”

“At more than dou­ble the ‘B’ me­dian of 43% for 2015, the GGGD ra­tio is still high and re­duces Cyprus’ fis­cal scope to ab­sorb do­mes­tic or ex­ter­nal shocks”, it said.

Fitch high­lighted that de­posits have been broadly sta­ble since cap­i­tal con­trols were lifted, “al­though non-res­i­dent de­posits (30% of to­tal) de­clined tem­po­rar­ily in the run-up to the Greek cri­sis this sum­mer.”

“While di­rect financial links be­tween Greek-owned sub­sidiary banks and Greece have been re­duced sig­nif­i­cantly, the sec­tor re­mains vul­ner­a­ble to Greece mainly via in­vestor con­fi­dence”, it noted.

The rat­ings agency said that there are still sig­nif­i­cant risks to cred­it­wor­thi­ness posed by Cyprus’ con­tin­ued deep eco­nomic and financial ad­just­ment.

It con­sid­ers that “the en­vi­ron­ment for banks re­mains chal­leng­ing, in par­tic­u­lar with re­gard to ex­cep­tion­ally weak as­set qual­ity.”

“The stock of con­sol­i­dated sec­tor NPEs was 47.4% of gross loans in Au­gust, the high­est of all Fitch-rated sov­er­eigns. Un­re­served prob­lem loans for the sec­tor (ie gross NPEs mi­nus sys­tem-wide pro­vi­sions) stood at EUR 18.8 bln, or 107% of GDP for the same pe­riod,” it said.

At the same time it added that “im­ple­men­ta­tion risks around bank­ing re­forms re­main high as the process is de­pen­dent on the po­lit­i­cal will to con­front debtors, which could wane in the run-up to par­lia­men­tary elec­tions in May 2016.”

Gov­ern­ment Spokesman Nikos Christodoulides wel­comed the dou­ble-notch up­grade, stress­ing that the great ef­fort must con­tinue for full eco­nomic re­cov­ery.

“The gov­ern­ment wel­comes the dou­ble up­grad­ing of the financial and credit abil­ity of our coun­try by the rat­ing agency, Fitch”, he said in a state­ment.

He pointed out that this “de­vel­op­ment is the re­sult of the col­lec­tive ef­fort on the part of the gov­ern­ment, the par­lia­ment, the so­cial part­ners but, mainly, of the Cypriot peo­ple.” Ac­cord­ing to Christodoulides “the pru­dent and con­sis­tent eco­nomic pol­icy and the ef­fort for re­form and mod­erni­sa­tion bring about re­sults and are in­ter­na­tion­ally rec­og­nized.”

House Pres­i­dent Yian­nakis Omirou also wel­comed the up­grade, but warned that chal­lenges re­main and that a new com­pre­hen­sive model for growth is nec­es­sary.

“The up­grade of the Cypriot econ­omy by Fitch con­sti­tutes a pos­i­tive de­vel­op­ment”, which has been achieved through the great sac­ri­fice of fel­low cit­i­zens, Omirou said.

It will en­hance Cyprus’ ef­fort to tap the mar­kets but “prob­lems re­main and chal­lenges are great”, he noted.

Re­fer­ring to non per­form­ing loans, he pointed out that their per­cent­age is still at a very high level. Re­solv­ing this mat­ter while con­tin­u­ing to up­hold so­cial co­he­sion, Omirou said, will safe­guard financial sta­bil­ity and will en­able the econ­omy to have ac­cess to fund­ing.

Find­ing a so­lu­tion to the NPLs will mean the re­turn to sta­ble and sus­tain­able growth rates, he added.

Ac­cord­ing to Omirou there is a need “to cre­ate a new com­pre­hen­sive growth model.” In this re­gard, he re­ferred to financial ser­vices, ship­ping, en­ergy, tourism, con­struc­tion, agri­cul­ture, re­search and in­no­va­tion point­ing out that with the right strate­gic plan­ning th­ese ar­eas can con­sti­tute the pil­lars of eco­nomic re­cov­ery.

Since 2011, Cyprus had been ex­cluded from in­ter­na­tional mar­kets due to the dra­matic de­te­ri­o­ra­tion of its fis­cal sit­u­a­tion that sub­se­quently led to the adop­tion of an eco­nomic ad­just­ment pro­gram in March 2013.

Its ex­clu­sion from the mar­kets, largely driven by the dire con­di­tions of its bank­ing sys­tem, led to the junk sta­tus grad­ing by all three credit agen­cies.

Since then a re­mark­able im­prove­ment has wit­nessed as cited by both Fitch and S&P in their re­ports, that led to the county’s up­grades.

It is ex­pected that Cyprus will exit the ad­just­ment pro­gramme as orig­i­nally planned in May 2016 when the three-year bailout plan ex­pires. been lat­est

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