World Economy

Fitch Upgrades Cyprus on Positive Outlook

Fitch Upgrades Cyprus on Positive OutlookFitch Upgrades Cyprus on Positive Outlook

Fitch Ratings upgraded Cyprus’s long-term foreign and local currency issuer default rating by two notches to B+ and placed it on positive outlook citing a fiscal “over-performance,” an expected declining trend of government debt, the implementation of cash-for-reforms program including the foreclosure law and faster economic recovery.

The rating company said that after achieving “an almost balanced budget” in 2014 compared to a fiscal shortfall of 8.5% of gross domestic product projected by Fitch, the government maintained “the positive momentum” this year as its balance remained in surplus up until the end of July, Yahoo reported.

The new rating is four grades below investment grade. Fitch, which took its last rating action in June 2013 when it downgraded Cyprus’s sovereign rating to B-, said that it projects a fiscal gap of 1% of economic output in 2015, before the government generates a 0.25 and 1% surplus in 2016 and 2017 respectively.

“General government gross debt is now expected by Fitch to peak at less than 108% of GDP this year, before falling to around 100% in 2017,” Fitch said. “This compares with a peak of over 130% projected by Fitch in June 2013.”

Cyprus’s government debt remains high, however, and reduces the economy’s ability to absorb domestic or external shocks, Fitch said.

“Cyprus is back on track in its International Monetary Fund–European Union program following delays in the fifth and sixth reviews that were pending the implementation of the foreclosure law, finally passed in May 2015,” the rating company said. “The seventh review took place in July and enabled the disbursement of €625 million in funding.”

The ratings agency said that the foreclosure law, along with a new insolvency framework, lay at the heart of the banking sector’s efforts to reduce its exceptionally high stock of non-performing exposures.

“A significant program hurdle was overcome in removing all restrictions on capital flows in April, ending two years of controls. Deposits have been broadly stable since then, although non-resident deposits declined temporarily in the run-up to the Greek crisis this summer. While direct financial links between Greek-owned subsidiary banks and Greece have been reduced significantly, the sector remains vulnerable to Greece mainly via investor confidence.”

Following the faster than anticipated return to economic growth, Fitch now estimates that the cumulative loss of Cyprus’s economic output will be 7.5% compared to the 14% which it projected three months after the 2013 bail-in.

“Growth has been supported by domestic demand, which in turn is buoyed by lower oil prices and an improvement in sentiment,” Fitch said. “The labor market is improving but remains weak; unemployment was still above 15% in August compared with less than 4% in 2008”.