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Upgrade of Cyprus Economy Rating

Standard and Poor’s and Fitch upgraded The Cyprus economy was upgraded yesterday the 25/04/2014 by Standard and Poor and Fitch. The upgrade came from the positive progress made so far in implementing the restructuring program and the achievement of financial targets.

Standard and Poor’s

S&P raised their long-term sovereign credit ratings on Cyprus to 'B' from 'B-' and affirmed their short-term sovereign credit ratings at 'B'. The outlook is positive.

“The shallower recession together with the government's budgetary consolidation measures have contributed to a smaller-than-expected general government deficit at 5.4% of GDP in 2013 by our estimate. We think the general government deficit will be about 5% of GDP this year and then continue falling thereafter, owing to the potentially improving economic backdrop and favorable labor market developments”, the agency said.

“We now project it will narrow by about 4% in 2014 on declining disposable income, owing to further job losses, falling wages, and budgetary consolidation, before resuming growth in 2015.”

According to S&P, the positive outlook incorporates the possibility that we could again upgrade Cyprus within the next 12 months if it continues to comply with the ESM/IMF program.

“We could raise the ratings if risks to the stability of financial sector--in particular the high level of bad loans and commercial arrears--are addressed, permitting the elimination of capital controls. We could also raise the ratings if the government's budgetary position improves, supported among other things by the government's planned privatization or restructuring of state-owned entities. In addition, we factor in the future likely convergence of the economy's wage and price trends with the average in the eurozone (European Economic and Monetary Union)”, S&P said.

“We could revise the outlook to stable if we thought the government was unable to fulfill the ESM/IMF program conditions, if the economic downturn was deeper than we anticipate, if budgetary performance deviated negatively from the government's targets, or if the stability of the banking sector was again jeopardized, particularly through unaddressed deterioration in asset quality or renewed capital flight”, the agency concluded.


Fitch Ratings has revised the Outlook on Cyprus's Long-term foreign currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B-'. The agency has also upgraded the Long-term local currency IDR to 'B-' from 'CCC'.

Other ratings have been affirmed with Short-term foreign-currency IDR at 'B' and Country Ceiling at 'B'. The issue ratings on Cyprus's senior unsecured foreign-law bonds have been affirmed at 'B-' and the issue ratings on unsecured local-law bonds have been upgraded to 'B-' from 'CCC'.

“Reform implementation under the EU-IMF programme continues to progress, supporting policy coherence and credibility. In particular, wages and prices are adjusting downwards in contrast to previous episodes of recession”.

“Driven by spending cuts in the public sector, compensation per employee fell 6% yoy in 2013. In the private sector compensation per employee fell by 5.3%”. Fitch expects the government to continue to adhere to programme parameters, following parliamentary approval on privatisation plans despite initial resistance from some political parties".

According to Fitch, fiscal targets have been exceeded by a significant margin. The general government deficit to GDP (GGD) ratio was contained at 5.4% in 2013, below the projected 7.8% under the second Troika review of the programme and Fitch's previous forecast of 6.7%. The outcome reflects a large fiscal correction and a less severe-than-expected recession.

“Tight expenditure control contributed significantly to the favourable outcome. "The economy has proven to be more resilient than previously expected. GDP contracted 5.4% in 2013, compared with the forecast 7.7% contraction under the second Troika review and Fitch's previous forecast of 7% decline”.

“Tourism and professional services (excluding banking) have shown some resilience.

Households have also been using their savings to smooth their consumption. Fitch has revised its GDP projections for 2014 to a contraction of 3.9%, from a 5.1% decline previously”.

“The risk of a repeat of Cyprus restructuring its domestic law bonds, which occurred in 2013, has reduced”, it added.

Medium weight

According to the firm, Cyprus's external debt position has improved compared with Fitch's previous forecast, in part due to favourable revisions to previous official data. The improvement also reflects positive trends in capital flows, including a significantly narrower current account deficit.

According to Fitch, there are still significant risks to creditworthiness posed by Cyprus's continued deep economic and financial adjustment, which is still in its early stages.

“The restructuring of the banking sector has also undermined the potential growth of the economy and unemployment will remain elevated in the near term. The stock of NPLs (as per Central Bank of Cyprus's new definition) on average reached 42% of gross loans at end-December 2013, and in some banks, was above 50%. The quality of assets may deteriorate further in the next quarters, albeit potentially at a slower pace. Banks have taken steps to enhance their internal arrears and restructuring processes and now face the challenge of limiting any additional credit deterioration and recovering NPLs without affecting their recently restored capital positions”

Risks to programme implementation have eased on recent performance but remain elevated. Medium-term fiscal targets, in particular, are ambitious.

Cyprus's financing requirements rise significantly after the end of the programme period, which could be challenging for the government.

According to projections by the IMF gross financing needs, including for buffers, will rise to EUR3.6bn in 2017 from EUR1.7bn in 2016.

“The process of lifting capital controls carries risks, and a premature exit could trigger material capital flight with negative economic consequences”, it added.

According to Fitch, future developments that may, individually or collectively, lead to a negative rating action include significant slippage from programme targets, in particular fiscal deficits, or adverse changes to public debt dynamics, a recession that is materially deeper or longer than assumed and a re-intensification of the banking crisis in Cyprus.

Future developments that may, individually or collectively, lead to a positive rating action include a longer track record of successful implementation of the EU-IMF programme, signs of a stabilisation in economic output and the banking sector, improvements in export performance that help facilitate the rebalancing of the economy and lifting of capital controls with no material negative economic consequences.

Finally, Fitch assumes Cyprus and the euro zone as a whole will avoid long-lasting deflation.




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