Moody’s ups bond rating outlook to ‘positive’

Moody’s rating agency changed the outlook on the Cyprus government bond rating to ‘positive’ from stable, earlier in November.

The rating agency had affirmed Cyprus’ long term issuer and senior unsecured bond rating at B1 and also affirmed Cyprus’ Senior Unsecured MTN Programme at (P)B1, the short-term rating Commercial Paper at NP and its other short term rating at (P)NP.

Moody’s had noted that the key drivers for the outlook change were two: first, the improvements in economic resilience over the past year which, if sustained, could support an upgrade, and second, Cyprus’ consistent fiscal outperformance and favourable outlook which indicate a more rapid reversal in the public debt ratio than previously expected.

Concurrently, Moody’s maintained the local-currency and foreign-currency bond ceilings at Baa1. The localcurrency and foreign-currency deposit ceilings remain unchanged at Baa1. The short-term foreign-currency bond and deposit ceilings remain unchanged at P-2.

The B1 rating was affirmed because of the small and relatively undiversified economy, the ongoing weakness of the banking sector and the very high levels of public and private debt.

Moody’s had noted that in spite of actions taken to stabilise and reduce the size of the banking sector, it remained large and weak. Banking sector assets comprised 377% of GDP. Private non-financial sector debt remained high, at nearly 350% of GDP. Cypriot banks have a high stock of non-performing loans (48.9% as of July 2016), which hampers their ability to lend and weighs on their profitability and liquidity profile.

Moody’s said that although asset quality is set to improve in 2016, helped by the approved foreclosure and insolvency framework in 2015, bank asset quality metrics will remain weak for years to come. It added that Cyprus also has high public sector debt levels relative both to GDP (at 107.5% in 2015) and to revenue (at 275% in 2015). Whilst debt trajectory is reversing, the decline in debt is expected to be slow.

In October, Fitch Ratings has upgraded Cyprus’ Longterm foreign and local currency Issue Default Ratings (IDRs) by one notch to BB- from B+.

“The issue ratings on Cyprus’ senior unsecured foreign and local-currency bonds have also been upgraded to BBfrom B+. The Outlooks on the long-term IDRs are Positive. The Country Ceiling has been upgraded to BBBfrom BB+ and the short-term foreign and local currency IDRs have been affirmed at B,” it said.