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Rating-Agentur Expert RA GmbH Confirms Cyprus Ratings at ‘BB+’

Rating-Agentur Expert RA GmbH Confirms Cyprus Ratings at ‘BB+’

Rating-Agentur Expert RA GmbH confirmed the sovereign government credit rating (SGC) of Cyprus at ‘BB+’ (Sufficient level of creditworthiness of the government) in national currency and at ‘BB+’ (Sufficient level of creditworthiness of the government) in foreign currency.

Rating-Agentur Expert RA GmbH confirmed the country credit environment rating (CCE) of Cyprus at ‘BB+’ (Sufficient quality of credit environment of the country) in national currency and at ‘BB+’ (Sufficient quality of credit environment of the country) in foreign currency.


Positive factors:
The debt structure improved further in 2017. Short-term debt amounted to 1% of GDP and 2,7% of budget revenues and represented only 1% of the total debt as of end-2017. Additionally, only 4% is issued in foreign currencies and 64% is in the form of official loans. However, the floating interest rate debt is slightly high and accounted for 46% of the total debt load by the end of 2017;
The fiscal stance improved in 2017 posting a surplus of 1,5% of GDP according to the Ministry of Finance. This surplus is mostly driven by an increase in tax collection and social security contributions, while on the expenditure side the subsidies declined. We expect further improvement of the fiscal stance driven by strong economic growth as well as the government’s commitment to a tight fiscal policy;
The country’s macro profile is encouraging as GDP per capita at PPP is projected to have remained solid at USD 36 600 and real GDP continued to grow by a robust 3,8% as of year- end 2017 (2,8% in 2016). The positive output dynamics remained driven by tourism, retail, construction and manufacturing;
High level of institutional development as Cyprus ranked 53rd out of 190 countries in the Doing Business ranking (45th in the previous report). Additionally, it has a very high Human Development Index (adjusted for inequality) at 0,762;
According to the World Bank’s Worldwide Governance Indicators, Cyprus is ranked 75th out of 214 territories in the Rule of Law Index which indicates a moderately strong confidence in contract enforcement, property rights, the police and the courts;
Net inflows of FDI in Cyprus amounted to 25% of GDP as of 2016 which is much higher compared to its peer countries1 (2,4% on average in 2016).
Restricting factors:
We expect private credit to GDP to have dropped further in 2017 to around 240% of GDP, compared to 266% by end-2016. All loan segments, including households, corporates and financial institutions followed a downward trend. Also, the banks’ assets to GDP ratio was estimated at around 360% in 2017 compared to 376% in 2016, but still remains the highest among its euro peers;
The unemployment rate continued to decline and reached 11% as of end-2017 remaining below its peers’ average. We expect this figure to continue its gradual decline driven by economic growth, particularly by the increase in private consumption;
Government guarantees stood at around 9,1% of GDP as of end-2016 compared to 15,4%
in 2015, which slightly reduced the risks associated to contingent liabilities;
The annual y-o-y inflation turned to negative ground in 2017 and stood at -0,4%. In line with the IMF, we still expect inflation to turn to positive territory over 2018 mostly driven by increases in prices of commodities, food, transportation and the tourism sector;
The Cypriot economy remains diversified but still highly focused in the services sector. As of 2017, the industry distribution in the three largest sectors was as follows: retail (21%), financial (10%) and real estate (9%);
The economy is moderately competitive. Cyprus is ranked 64th out of 137 countries in the Global Competitiveness Index report (2017-2018) prepared by the World Economic Forum (83rd in the previous ranking). Moreover, the trade balance widened to -2% of GDP in 2017 compared to -0,8 in 2016;
Despite  government  efforts  to  continue  with  the  privatization  program,  the  overall process remains delayed, shown by the recent parliament initiative to pass the law for scrapping the privatization unit within the Ministry of Finance. However, the government is still determined to go forward with privatization plans in order to further reduce the debt burden.
Negative factors:
The government debt level improved better than we anticipated in our previous revision.
As of end-2017, it stood at around EUR 18,7 bn, the lowest level since 2014. Additionally, supported by a robust GDP growth of 3,8% in 2017, the debt to GDP ratio declined to around 100% as of end-2017 compared to 106% in 2Q 2017 and still stands below the average level of debt among its euro peer countries. Even though we expect a continued decline of this metric in the following years boosted by GDP growth and fiscal surpluses, the still high level of government indebtedness remains a key negative factor;
The banking system continued its recovery through 2017. NPLs declined further as a share of total loans and stood at 43,7% as of November 2017 compared to 47% by end-2016, but remain substantially high. The profitability worsened as compared to 2016, with ROA standing at -1,3% by September 2017. Nevertheless, the banking sector is still well capitalized with capital to assets ratio at 9% and overall solvency ratio at 16,2% as reported by the Central Bank of Cyprus as of September 2017;
FX reserves continued to decline in absolute terms and stood at around 3,3% of gross government debt as of December 2017 and covered only half a month of imports in December 2016. Nonetheless, we do not expect this to affect the economy in case of a currency shock since most of their trade is done within the EU;
The stock market remains underdeveloped with 80 listed companies as of December 2017 (74 in January 2017). Furthermore, market capitalization stood at EUR 2,3bn (12,5% of GDP).
Support factors:
Participation in a strong currency and political union. Cyprus is part of the European
Economic and Monetary Union (EMU) since 2004 (moderately strong support factor);
The country has a very strong and important reserve currency (EUR) (moderately weak support factor).
Stress factors:
Dependence on partner-countries for provision of financial support in crisis situations has decreased since Cyprus left the three-year economic adjustment program European Stability Mechanism (ESM) and the International Monetary Fund (IMF) last year (weak stress factor).
Positive factors:
Narrow spread between interest rates on loans and deposits at 2,8% as of December 2017 (3,12% in 2016 and 3,52% in 2015).
Restricting factors:
The Cyprus Stock Exchange General Index (CYSMMAPA) was stable in 2017 starting the year at 68,4 points in January and standing at 69,5 points as of December 2017.
Negative factors:
Marginal  quality  and  quantity  of  instruments  offered  in  the  financial  market  of  the country;
Private sector debt (domestic and external), despite declining over the years, remains extremely high at around 706% of GDP in 3Q 2017 (734,5% in 2016).
The following developments could lead to an upgrade:
Further improvement of the debt metrics driven by fiscal surpluses and solid GDP growth with declining unemployment and consolidation of the current account;
Reduction of NPLs ratio and further decline of private and external debt metrics. The following developments could lead to a downgrade:
GDP growth lower than anticipated which will result in higher debt levels and widening the current account deficit;
A  rebound  trend  of  NPLs  dynamics  followed  by  deterioration  of  the  banking  sector metrics.


“The Agency’s confirmation of the ratings of Cyprus at BB+ reflects better than anticipated GDP growth, a positive fiscal balance and, despite remaining the key risk for the economy, a slight improvement of the banking system metrics. Additionally, the government debt level declined further and we expect it to continue in a downward trend in the following years driven by GDP growth and expected fiscal surpluses. Finally, the level of unemployment is at new record low since the 2013 crisis. We could upgrade the rating in our next revision, if positive factors continue with the current trend and the negative variables improve further.” - Clarified Marko Denic, Rating Analyst of Rating-Agentur Expert RA GmbH.”


Research report on Cyprus is available at:

Next scheduled rating publication: 5 October 2018. The full sovereign rating calendar can be found at




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