Fitch affirms Cyprus stable outlook on growth potential

Fitch Ratings affirming Cyprus’ LongTerm Foreign-Currency Issuer Default Rating (IDR) at BBB- with a Stable Outlook has been welcomed as a vote of confidence by the government.

Fitch said Cyprus’ rating balances its institutional strength reflected in per capita GDP and governance indicators in line with the ‘A’ median rather than BBB.

It acknowledged a track record of robust economic recovery and sound fiscal policy before the COVID-19 shock with balance sheet weaknesses, in particular, further increase in high public debt and declining, but still elevated non-performing exposures (NPEs) in the banking sector.

Finance Minister Constantinos Petrides said that Fitch maintains the creditworthiness of the Republic of Cyprus in the investment grade with a stable outlook. He said institutional strength reflected in per capita GDP, governance indicators, a history of strong economic recovery and sound fiscal policy before the pandemic are factors maintaining the rating of the Republic of Cyprus.

Fitch said the COVID-19 pandemic has led to a deep recession of the Cypriot economy in 2020, similar to many rating peers.

GDP contracted by 11.6% QoQ in 2Q20 following a 2.1% fall in 1Q20.

Tourism was hit particularly hard with tourist arrivals more than 80% lower in January-August 2020 than a year ago while domestic demand was more resilient due to the relatively low infection rates and limited lockdown measures.

Fitch forecasts a 6% GDP contraction in 2020 followed by a 4% rebound in 2021 and 2.7% growth in 2022 based on positive QoQ growth rates from 3Q20 onwards.

The forecast implies the level of GDP will be 2pp lower in 2021 than the pre-crisis level.

Cyprus had a strong track record of growth before the pandemic with average growth in the five years to 2019 of 4.4%, above the `BBB` median of 3.6%.

Fitch maintains its assumption of 2% growth potential over the medium term, unchanged by the pandemic.

It said the pandemic ended the gradual improvement in the labour market, which started in 2014 from a peak unemployment rate above 16%, but the deterioration from 6.3% in 4Q19 to 6.8% in 2Q20 was comparatively mild.

The subdued labour market impact of the deep recession is partly due to government support measures and the flexibility of key industries, like tourism, reflected in the high share of seasonal foreign workers in the sector.