CI: Outlook for Cyprus’ Ratings Revised to ‘Positive’


Capital Intelligence Ratings (CI Ratings or CI)the international credit rating agency, has announced that it has affirmed the Republic of Cyprus’ Long-Term Foreign Currency Sovereign Rating at ‘BB-’ and its Short-Term Foreign Currency Rating at ‘B’. At the same time, the Outlook for Cyprus’ ratings has been revised to ‘Positive’ from ‘Stable’.


The revision of the Outlook to ‘Positive’ from ‘Stable’ reflects the following factors:

a) robust economic recovery, with growth among the highest in the Eurozone and better than previously forecasted fiscal outturns;
b) satisfactory government access to international capital markets;
c) CI Ratings’ expectation that the public debt will decline at a faster pace than already envisaged, underpinned by primary budget surpluses; and
d) gradually improving conditions in the banking sector. 


Cyprus’ economy continued its robust recovery, with real output growing by 3.9% in 2017, compared to 2.8% in 2016, driven by the services sector (especially tourism), which continues to benefit from regional instability in addition to the continuous increase in the gross capital formation characterised by ongoing foreign infrastructure projects. CI expects the economy to expand at a satisfactory rate of about 3.0% on average in 2018-19 fuelled by a robust services sector, recovering construction and recovering domestic demand. Downside risks to the outlook appear to be receding with both the construction and banking sectors showing more solid signs of improvement. Foreign direct investment is also expected to pick up in the short to intermediate term given government initiatives to encourage international private investment in new casinos, hotels, marinas and renewable energy projects. However, the strong growth cycle remains subject to risks stemming from excessive concentration of activity into construction and real estate and from potentially volatile capital flows.

The public finances have strengthened further, with the general government budget expected to post a small surplus of 2.9% of GDP in 2017 and a primary budget surplus of around 4.9% of GDP. The overall budget position is expected to register healthy surpluses averaging 2.5% of GDP in 2018-19, provided fiscal discipline is maintained. Given fiscal reforms and more favourable economic conditions, the ratio of general government debt to GDP declined to 98.4% in 2017 (below CI’s previous forecast of 102.4%) and is expected to continue its downward trend reaching 86% of GDP in 2020.

Short-term refinancing risks appear manageable and the government is currently able to access capital markets at favourable and sustainable rates. The government has been active in pre-financing scheduled debt repayments and actively managing its balance sheet to benefit from favourable market conditions. In June 2017 the government successfully issued a seven-year EMTN bond amounting to EUR850 million with a coupon of 2.75%. The issuance, which was fully sold and attracted a diversified investor base, was performed in conjunction with a switch offer of the EMTN bonds maturing in 2019 and 2020. In November 2017 the government of the Republic of Cyprus repaid part of a 3.00% loan held by the Central Bank of Cyprus. This early repayment amounts to EUR614.9mn plus EUR6.3mn accrued interest and represents a projected reduction of the public debt to a GDP ratio of 3.2%.

Despite the government’s commitment to post-financial assistance programme reforms, CI notes that there have been delays in enforcing certain new laws and in implementing specific politically-sensitive reforms, which may be partly attributable to the run up to the presidential elections that took place earlier this year. These measures include reforms to the public sector (including its size and wage bill), a new foreclosure framework, and privatisation. Despite the implementation risk, CI does not foresee a material weakening of budget performance or public debt dynamics.