Moody’s Research Announcement – a welcome vote of confidence in Cyprus?

On 15 April 2020 Moody’s Investors Service announced that it was downgrading the outlook for the Cyprus banking system from ‘positive’ to ‘stable’ as a result of the probable impact of the coronavirus (Covid-19) on the Cyprus economy. The overall credit rating, however, remained constant at the Ba2 grade assigned to it in September 2019. The action mirrors that taken by Fitch’s rating agency earlier in the month. Fitch also maintained its grading of the Cyprus credit risk at BBB- but adjusted the outlook to ‘stable’ from ‘positive.’  The actions of both agencies may be regarded as a vote of confidence in the overall resilience of the Cyprus economy and its ability to bounce back from the economic downturn caused by Covid-19.

Both agencies had previously moved to a ‘positive’ outlook for Cyprus following a gradual improvement in non-performing exposures (NPE) and an associated strengthening of bank asset quality. Cyprus was also viewed as having outperformed fiscal expectations since exiting the macroeconomic adjustment programme in March 2016; to the extent that Moody and Fitch both now regard it as having a good record of fiscal consolidation and prudent fiscal policy. Inevitably, due to the Covid-19 pandemic, an economic downturn is predicted for 2020 which will reverse the trend of steadily declining problem loans and erode bank profitability. Importantly, this is viewed as a temporary setback only. The improvement in bank capital and liquidity positions in recent years is regarded as being adequate to enable them to absorb a short-term deterioration. Hence, the immediate outlook for the economy is reassuringly viewed as stable rather than negative.

Both Moody and Fitch anticipate that measures taken by the Cyprus government and the Central Bank will be effective in minimizing long term damage to the economy and result in a return to a healthy level of economic activity in 2021. Indeed, following the initial shock, the country is expected to quickly return to its medium-term GDP growth forecast trajectory of 2%. Importantly, this confidence appears to be shared by the international markets as evidenced by the oversubscription for the recent issue of seven year and thirty-year government bonds. There is, however, no room for complacency, whilst Cyprus scores well on many economic drivers it remains vulnerable to credit challenges arising as a result of its small and relatively undiversified economy. It is vitally important, therefore, that it continues to focus on long term reduction of the level of NPEs. If it can return to a downward trajectory it has a real prospect of being rewarded with a ‘positive’ outlook and, in time, a rating upgrade.

 

For more information please speak with your usual contact at Elias Neocleous and Co LLC.

To read the Fitch report follow this link.

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