Standard & Poor’s upgraded Cyprus’ credit ratings back to investment grade, after calling them “junk” for almost seven years. Οn the 14th of September, S&P raised Cyprus’ sovereign credit ratings from ‘BB+/B’ to ‘BBB-/A-3’ with stable outlook.
S&P was one of the first credit rating agencies to downgrade Cyprus’ ratings to junk, back in January 2012.
The rating agency notes that Cypriot authorities have carved out the bad assets of the country’s second-largest bank, paving the way for a significant reduction in the banking sector’s nonperforming assets.
“Strong economic growth through 2021, prudent policymaking, and only moderate state support to the banking system will allow the government to run budgetary surpluses and prompt a reduction in public debt”, they add.
They say that Cyprus ratings could be raised over the next two years if the economy deleverage significantly, or if the banking sector reduce its nonperforming exposures (NPEs) materially, and its financial conditions improve.
The ratings could come under pressure “if economic growth is significantly lower than the projections, endangering private debt service and financial sector improvements, or if contrary to the expectations, the general government debt burden rises substantially”.
They note that the ratings on Cyprus are constrained by the economy’s high indebtedness reflected both in its public and private sector, the still-high proportion of NPEs in the banking system, and Cyprus’ small size relative to other eurozone member-states.
S&P forecasts that the economy will further grow at a solid pace through 2021, enabling the government to alleviate its debt burden. It projects that the economy expands by 4% in 2018 and by 3% on average between 2019 and 2021. Real GDP growth by 4% in 2018, will allow a return to the economy’s 2011 pre-crisis size, it is added.
S&P also says that unemployment rates are declining, falling from 16% in 2014 to 11% in 2017, then further to 9.5% in the first five months of 2018.
They also note that Cypriot private sector balance sheet is among the most indebted in Europe, at about 240% of GDP at the end of 2017, and it is likely to remain high over the medium term.
