Moody’s Rating Agency changed its Cyprus economy outlook from stable to positive due to reduction of sovereign exposure to event risks coming from the banking sector, as well as improving economic strength surpassing previous expectations.
“The primary driver of the positive outlook is that Cyprus’ bank-related exposure to event risk continues to decline,” Moody’s said.
The agency also noted that government and bank policy actions will potentially lead to a further significant reduction in Non-Performing Exposures (NPEs) over the next 18 months.
Recalling that NPEs significantly declined to 30.6% of gross loans in March 2019 from their peak of 49.8% in May 2016, Moody’s “expects that number to continue to fall, and quite possibly to halve, over the next 12-18 months.”
Tackling the most difficult area of NPEs, the government’s scheme ESTIA, launched on September 2nd, aims to subsidise repayment of NPEs collateralised by primary residences by one third with these loans.
Moody’s said that, ESTIA will assist repayment of NPEs amounting to € 1.1 billion held by Bank of Cyprus and Hellenic Bank rated by the agency.
Moreover, Moody’s noted that “Cyprus`s debt metrics are improving at a faster pace than we had previously anticipated and from a lower level,” and that “The government has returned to running large primary and fiscal surpluses, and we expect this trend to continue.”
According to Moody’s, that debt is expected to fall to 97% of GDP this year and, due to sizeable primary surpluses and ongoing low funding costs, it will continue to fall by around 5% per year, to around 75% by the end of 2023.
“While Cyprus faces rising spending pressures coming from health care, public sector wages, and Estia, we believe that the debt burden will continue to decline, albeit at a slower pace, even were these pressures to increase expenditure levels,” the agency said.
