TUESDAY, 27 OCT 2020

 

CONNECT

Facebook Linked In Twitter
GAP Vassilopoulos
GloriaJeans_266x90px
IMH LTD

Petrides: No Lockdown Forseen in 2021 State Budget

Nicos Anastasiades: Α Cyprus Solution Based On UN Resolutions Is Our Unwavering Goal

IMH LTD

ECONOMY

Cyprus’ Sovereign Ratings Affirmed, Outlook Remains Stable

Cyprus’ Sovereign Ratings Affirmed, Outlook Remains Stable

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Republic of Cyprus’ Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) at ‘BB+’ and ‘B’, respectively. At the same time, the Outlook for sovereign’s ratings was affirmed as Stable.

 

Rating Rationale

The ratings and Outlook reflect CI’s expectation that the economy will start to recover in the final quarter of this year from the disruption caused by the Covid-19 pandemic. The ratings are primarily underpinned by the pursuit of generally sound macroeconomic policies and relatively high GDP per capita, as well as the benefits derived from the country’s membership of the European Union and eurozone, including access to funding mechanisms recently established to help countries recover from the coronavirus-related downturn in economic activity. The ratings are also supported by proactive public debt management – which has helped to improve the debt structure in recent years – and adequate government access to capital markets.

 

Economic performance is expected to weaken this year by much more than envisaged in our last review, with the adverse impact of Covid-19 driving the economy into recession. Real GDP fell by 11.9% in the second quarter 2020 as containment measures and reduced demand caused output to contract in key sectors such as tourism, construction, manufacturing and transportation. The labour market has been hit hard by the recession and following several years of steady improvement the unemployment rate is expected to reverse course and increase to 9% in 2020.

 

Prior to the Covid-19 shock, the Cypriot economy was growing at a satisfactory pace and the government was pursuing relatively sound macroeconomic policies. Assuming the effects of the pandemic gradually dissipate going into 2021, we expect real GDP to increase by 6.1% next year as private domestic demand begins to strengthen, tourism starts to recover (albeit to below pre-pandemic levels), and government policy continues to support economic activity, possibly with the help of EU funding. Risks to the growth outlook remain significant, however, given the uncertainty surrounding the evolution of the pandemic. Other potential risk factors affecting the outlook include the concentration of economic activity in the construction and real estate sectors, and the high debt overhang in the private sector.

 

Fiscal performance has suffered a temporary setback this year due in part to the implementation of government support measures to soften the impact of Covid-19 on the economy. The general government budget position is expected to post a deficit of 7% of GDP in 2020, compared to a surplus of 1.7% in 2019. The primary budget position is also expected to post a deficit of 4.6% of GDP in 2020, compared to a surplus of 4.2% in the previous year. That said, the temporary increase in current spending is expected to be phased out towards the end of the year, leading to a more favourable fiscal outlook, with the general government budget deficit declining to 1.8% of GDP in 2021.

 

Reflecting higher financing needs and contracting nominal GDP, general government debt is expected to increase to 120.5% of GDP in 2020, from 95.5% in 2019. However, the debt trajectory is expected to return to a favourable path in 2021, with the debt ratio declining to around 109.8%. At present, short-term refinancing risks appear manageable given the government’s sound fiscal management and good access to capital markets at favourable rates, as well as the prudent building of cash buffers to cover financing needs for the next nine months.

 

External strength remains moderately weak, with the current account deficit expected to widen to 7% of GDP in 2020, compared to 6.1% in 2019, as a result of the significant decline in tourism receipts. External refinancing risks are deemed manageable, while external debt is high at 390.6% of GDP in 2019. Excluding the external debt of Special Purpose Entities (SPEs), external debt is estimated at 259.7% of GDP (217.1% of CARs) in 2019.

 

Cyprus’ ratings continue to be supported by the country’s relatively high GDP per capita, as well as improving policy predictability and institutional strength, in tandem with broad-based legislative, economic and judicial reforms. Nonetheless, there remain delays in implementing certain judicial reforms which would facilitate speedier foreclosures in the banking sector, and little has been done to reduce the size of the large public sector. The ratings also remain constrained by high general government indebtedness, the large debt overhang in the private sector, significant external financing needs, and the weakness of the banking sector. 

 

CI notes that banks’ balance sheets remained resilient in the first few months of 2020. The banking sector is considered adequately capitalised, while the non-performing exposures (NPEs) ratio remained unchanged at 27.7% of gross loans as at end-April 2020. Moreover, loans in arrears over 90 days, excluding restructured facilities, rose to EUR7.62bn (23.6% of gross loans) during the same period. As part of its economic support measures, the government introduced a moratorium period on loans granted by banks to the private sector until the end of the current year.

 

Although banks have increased their provisioning due to the pandemic, risks stemming from the relatively low provisioning level, which stood at 55.2% of NPEs in April 2020, and the private sector’s large debt overhang still persist. Moreover, weak economic performance and increasing socioeconomic vulnerabilities could potentially pose a serious challenge to the banking system and its asset quality once the moratorium period ends. In an attempt to partially mitigate these risks, banks are becoming more active in selling NPEs to credit management institutions.

 

Rating Outlook

The Outlook for the ratings is Stable, indicating that the ratings are likely to remain unchanged in the next 12 months. The Outlook balances the direct adverse repercussions of Covid-19 on the economy and the public finances against the government’s prudent macroeconomic policies and CI’s expectation that the economy will rebound once the pandemic diminishes.

 

Rating Outlook: Upside Scenario

The Outlook could be revised to Positive should economic activity recover quickly and if the government restores its strong fiscal discipline and public debt returns to its declining trajectory.

 

Rating Outlook: Downside Scenario

Conversely, the Outlook could be revised to Negative in the event the public finances weaken significantly due to adverse economic conditions and/or policy shifts, or if the banking system requires further financial assistance from the government.

 

MORE ON ECONOMY

Public Expenditure For Education Rose In 2018 In Absolute Numbers

Public expenditure on education rose to 1,247.8 million euros in 2018, according to ...

Petrides: No Lockdown Forseen in 2021 State Budget

Minister of Finance Constantinos Petrides called on MPs to approve the 2021 state budget ...

Debate On Cyprus` State Budget 2021 Begins Today

Debate on Cyprus` state budget 2021 begins today in the Parliamentary Committee on ...

FROM AROUND GOLDNEWS

   

The ‘New Normal’ – What Is It And What Does It Mean For Pensions And Provident Funds?

IMH and Aon are organising the 11th Pension and Provident Funds Forum on Wednesday 25, November 2020 at the Hilton Nicosia (formerly Hilton Park) in Nicosia, ...
   

BidX1 To Offer More Than 60 Assets At 12th November Digital Sale

BidX1, the digital property investment platform, has announced details of its upcoming digital sale in Cyprus, which will take place on 12th November 2020 via ...
   

Webarts Presents The 7th Advertising, Marketing and Communication Conference

Webarts presents the "7th Advertising, Marketing and Communication Conference" on Wednesday, 18 November 2020 at the Hilton Nicosia (formerly Hilton ...
   

KPMG Is The Main Sponsor Of The 4th Project Management Conference

KPMG is a global network of independent member firms offering audit, tax and advisory services. On behalf of KPMG Sina Zavertha, a Business Consultant and ...
   

BP Returns To Profit But Pandemic Weighs On Demand

BP returned to profit in the third quarter, but the global coronavirus crisis continued to hit demand for oil. BP said underlying replacement cost profit, its ...
   

NewCytech Business Solutions Sponsors 4th Project Management Conference

In recognition of the valuable contribution of PMI Cyprus Chapter to the Project Management community and its substantial professional support to its members ...
   

Economic Sentiment Drops In October, UCY's Economics Research Centre Survey Shows

Economic sentiment deteriorated in October, a monthly indicator by the University of Cyprus` (UCY) Economic Research Centre (ERC) shows. According to ...
   

Public Expenditure For Education Rose In 2018 In Absolute Numbers

Public expenditure on education rose to 1,247.8 million euros in 2018, according to preliminary estimations of the Statistical Service, while as a GDP ...
 

YOUR COMMENTS

HEADLINES

MOST POPULAR

Gold_October_300x250px
GloriaJeans_300x250px

IMH LTD