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).
ADDITIONAL FACTORS THAT INFLUENCED CCE RATINGS:
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).
SENSITIVITY ASSESSMENT:
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: https://raexpert.eu/reports/Research_report_Cyprus_06.04.2018.pdf
Next scheduled rating publication: 5 October 2018. The full sovereign rating calendar can be found at http://raexpert.eu/sovereign/#conf-tab-5