Moody's Changes Cyprus Government Bond Rating Outlook to Positive from Stable

14/11/2016
Moody`s rating agency has changed the outlook on the Cyprus government bond rating to positive from stable, Cyprus News agency reports.

 According to a press release of the agency affirmed, issued on Saturday, November 12, Moody`s Cyprus` long term issuer and senior unsecured bond rating at B1 and has also affirmed Cyprus` Senior Unsecured MTN Programme at (P)B1, the short-term rating Commercial Paper at NP and its other short term rating at (P)NP.
The Moody`s notes that the key drivers for the outlook change are two. First, the improvements in economic resilience that have been observed over the past year which, if sustained over the next 12-18 months, would support an upgrade and second Cyprus` consistent fiscal outperformance and favourable outlook which indicate a more rapid reversal in the public debt ratio than previously expected.

Concurrently, Moody`s has maintained the local-currency and foreign-currency bond ceilings at Baa1. The local-currency and foreign-currency deposit ceilings remain unchanged at Baa1. The short-term foreign-currency bond and deposit ceilings remain unchanged at P-2. Moody`s explains the reasons that Cyprus` rating was affirmed at B1, whilst acknowledging improvements in Cyprus` economic resilience and its strong fiscal performance.
The first reason is the country`s small and relatively undiversified economy, second the ongoing weakness of its banking sector and third its very high levels of public and private debt. Cyprus has a small and relatively undiversified economy, dominated by its service sector, which accounts for more than four-fifths of GDP. Within the service sector, tourism, financial services, shipping and real estate have traditionally predominated, it said.

Moody`s notes that in spite of actions taken to stabilise and to reduce the size of the Cypriot banking sector, it remains large and weak. Banking sector assets comprise 377% of GDP. Private non-financial sector debt remains high, at nearly 350% of GDP. Cypriot banks have a high stock of non-performing loans (48.9% as of July 2016), which hampers their ability to lend and weighs on their profitability and liquidity profile. Although we expect, says Moody`s, asset quality to improve in 2016, helped by the approved foreclosure and insolvency framework in 2015, we expect that bank asset quality metrics will remain weak for years to come.
Cyprus also has high public sector debt levels relative both to GDP (at 107.5% in 2015) and to revenue (at 275% in 2015). Whilst debt trajectory is reversing, the decline in debt is expected to be slow.
Offsetting that, Cyprus` debt remains highly affordable, reflecting the very large share of official sector creditors in the total debt stock (63% as of the third quarter of 2016). Interest charges took up only 7.2% of general government revenue in 2015, down from a peak of 8.5% in 2013, and this is expected to fall further over the coming two years.
The agency believes that the prevailing low interest rate environment, and the liquidity buffer that covers debt repayments for the next year, mitigate liquidity risks effectively. Moreover, it expects fiscal discipline to be sustained in spite of the ending of Cyprus` programme with the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) in March 2016, which should support investor confidence.