S&P af­firms Cyprus credit rat­ings at BB-/B, sees 2% growth in 2016-19

Financial Mirror (Cyprus) - - FRONT PAGE -

Stan­dard and Poor’s (S&Ps) rat­ing agency on Fri­day af­firmed Cyprus’ long- and short-term sov­er­eign credit rat­ings at ‘BB-/B’, with a pos­i­tive out­look, say­ing it ex­pected the Cypriot econ­omy to con­tinue to grow at more than 2% in real terms over 2016-2019, while strength­en­ing its bud­getary po­si­tion and re­duc­ing govern­ment debt.

The rat­ing agency said that the fi­nan­cial sec­tor’s high level of non­per­form­ing loans (NPLs) re­mains the key con­cern for fi­nan­cial sta­bil­ity and eco­nomic per­for­mance.

“Fol­low­ing the con­clu­sion of Euro­pean Sta­bil­ity Mech­a­nism/In­ter­na­tional Mon­e­tary Fund-fi­nanced eco­nomic ad­just­ment pro­gramme in March, we ex­pect the Cypriot econ­omy will con­tinue to grow at more than 2% in real terms over 2016-2019, de­spite high lev­els of NPLs re­main­ing a key con­cern for fi­nan­cial sta­bil­ity and eco­nomic per­for­mance” S&P said in an an­nounce­ment.

The agency ex­pected un­em­ploy­ment to de­cline fur­ther to below 13% by 2018, which will sup­port con­sump­tion.

It also said that it con­sid­ered “the pos­si­bil­ity of a re­uni­fi­ca­tion of the is­land, which would rep­re­sent an im­por­tant pos­i­tive con­tri­bu­tion to the coun­try’s growth rate, even if it pre­sented ini­tial fis­cal and ex­ter­nal chal­lenges”.

“Last year’s bud­getary out­come in­cludes sev­eral deficit-in­creas­ing one-off items, and as a re­sult of this as well as solid eco­nomic growth more than off­set­ting the re­moval of pub­lic wages and pen­sion freezes, we ex­pect Cyprus’ bud­getary po­si­tion will i mprove and post sur­pluses over the fore­cast pe­riod,” S&P said.

More­over, the rat­ing agency said that ahead of par­lia­men­tary elec­tions in May, it did not ex­pect the govern­ment to con­tinue with dis­cre­tionary deficitre­duc­ing mea­sures, but that the govern­ment’s bud­getary po­si­tion will ben­e­fit from a grad­ual re­duc­tion in un­em­ploy­ment ben­e­fits and an in­crease in cycli­cal rev­enue items against the back­ground of con­tin­u­ous eco­nomic re­cov­ery.

S&P pro­jected that net gen­eral govern­ment debt will de­cline below 80% of GDP by 2019 and that gen­eral govern­ment in­ter­est pay­ments will av­er­age about 6.3% of gen­eral govern­ment rev­enues dur­ing 2016-2019.

“Fol­low­ing the con­clu­sion of the IMF/ESM-fi­nanced pro­gramme ear­lier this month, we be­lieve that po­ten­tial loss of el­i­gi­bil­ity for the Euro­pean Cen­tral Bank’s pub­lic sec­tor pur­chase pro­gramme will not im­pair the sov­er­eign’s ac­cess to fund­ing in the fi­nan­cial mar­ket,” the rat­ing agency noted. It said that “fi­nan­cial sta­bil­ity re­mains a key risk” warn­ing that “given the high level of the NPLs, more res­o­lute mea­sures may be needed to im­prove the bank­ing sys­tem’s as­set qual­ity”.

“The pos­i­tive out­look re­flects our view that we could raise the rat­ings this year should eco­nomic re­cov­ery ex­ceed our pro­jec­tions in real and nom­i­nal terms. We could also raise the rat­ings should Cypriot banks ac­cel­er­ate progress in re­duc­ing cur­rently high lev­els of NPLs on their bal­ance sheet. This, in our opin­ion, would lead us to as­sess that Cyprus’ credit and mon­e­tary con­di­tions were con­verg­ing with those of the Eu­ro­zone” it noted.

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