Moody’s raises bond rat­ing to B1

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s In­vestors Ser­vice up­graded Cyprus’ gov­ern­ment bond rat­ing by two notches to B1 from B3 on Fri­day, main­tain­ing a ‘stable’ out­look, with the short-term rat­ing af­firmed at Not-Prime (NP).

As is com­mon in such cases, a Moody’s up­grade of the long-term rat­ings of the three main banks could fol­low. The Bank of Cyprus long term rat­ing is Caa3, is­sued on May 28, Hel­lenic Bank’s rat­ing is Caa2 is­sued on June 12, and RCB car­ries a rat­ing of Caa1 is­sued in Novem­ber last year.

The rat­ing agency said that the key driv­ers for the bond rat­ing up­grade are the faster than ex­pected eco­nomic re­cov­ery and the ex­pec­ta­tion of a con­tin­ued more broad-based growth that ex­tends be­yond ex­ports. More­over, the econ­omy has demon­strated re­siliency to ex­ter­nal risks, em­a­nat­ing from Greece (Caa3, stable) and Rus­sia (Ba1, neg­a­tive). Af­ter three years of con­trac­tion, real eco­nomic growth is ex­pected to reach 1.2% in 2015 and 1.4% in 2016. More­over, medium-term growth is ex­pected to be more bal­anced, sup­ported by a re­cov­ery in do­mes­tic de­mand helped by a sta­bil­i­sa­tion of the fi­nan­cial sec­tor, im­proved com­pet­i­tive­ness and the im­ple­men­ta­tion of struc­tural re­forms.

Moody’s added that con­sis­tent out­per­for­mance on fis­cal tar­gets have led to a quicker re­ver­sal in the pub­lic debt ra­tio. A com­bi­na­tion of bet­ter than ex­pected growth and also strong bud­get ex­e­cu­tion un­der­score fis­cal out­per­for­mance. The rat­ing agency expects fis­cal dis­ci­pline to con­tinue post pro­gramme exit and through par­lia­men­tary elec­tions next year.

Un­der Moody’s base­line sce­nario, the gov­ern­ment debt bur­den will now reach be­low 100% by next year and around 80% of GDP by 2020. More­over, it expects the coun­try to suc­cess­fully exit the eco­nomic ad­just­ment pro­gramme (fi­nanced by the Euro­pean Sta­bil­ity Mech­a­nism, ESM, and the IMF) by mid2016, fur­ther sup­ported by the build-up of sig­nif­i­cant liq­uid­ity buf­fers.

Con­cur­rently, Moody’s has raised the lo­cal­cur­rency and for­eign-cur­rency bond ceil­ings to Baa1 from Baa3. The short-term for­eign-cur­rency bond ceil­ing has been raised to Prime-2 (P-2) from P-3, while the short-term for­eign-cur­rency de­posit ceil­ing has been raised to P-2 from NP.

The more bal­anced growth pat­tern is also driven by the sta­bil­i­sa­tion in the fi­nan­cial sec­tor, which has re­sulted in a slight uptick in cor­po­rate credit growth this year. While still very weak (with a weighted av­er­age Base­line Credit As­sess­ment of caa3), the fi­nan­cial sec­tor re­flects stable liq­uid­ity trends and in­creas­ing prospects for a re­turn to prof­itabil­ity. Im­por­tantly, de­posits re­main stable at a sys­temic level de­spite the full lifting of cap­i­tal con­trols on April 6.

Moody’s also expects that re­cent laws im­ple­mented in the fi­nan­cial sec­tor, namely the in­sol­vency and fore­clo­sure frame­work, will sup­port the grad­ual re­duc­tion of non-per­form­ing loans (NPLs) in the sys­tem, which are cur­rently at a high 47% of to­tal loans. That said, Moody’s notes that both the cor­po­rate and house­hold sec­tors con­tinue to have high, al­beit re­duc­ing debt bur­dens.

Down­ward pres­sure on Cyprus’s B1 gov­ern­ment bond rat­ing could emerge if the gov­ern­ment’s com­mit­ment fis­cal dis­ci­pline re­duces, es­pe­cially once the EC/IMF pro­gramme con­cludes. Ev­i­dence that the bank­ing sec­tor needs fur­ther re­cap­i­tal­i­sa­tion sup­port from the gov­ern­ment would also ex­ert down­ward pres­sure on the rat­ing.

The Co­op­er­a­tive Cen­tral Bank an­nounced last week that the gov­ern­ment-owned lender, bailed out with a EUR 1.5 bln in­jec­tion last year, may need a fur­ther EUR 150-200 mln in fresh cap­i­tal from the 99% share­holder.

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