On 15 May 2020, DBRS became the latest international credit rating agency to announce its assessment of Cyprus’ credit worthiness. Encouragingly, despite Cyprus now being two months into the Covid-19 pandemic ‘lockdown’ measures, and their obvious negative economic consequences, the agency has chosen to maintain Cyprus’ overall long term issuer rating at BBB(low), and its short term issuer rating at R2, echoing the earlier announcements of Moody (15 April 2020) and Fitch (3 April 2020). Unsurprisingly, all three agencies have altered their ‘outlook’ assessments for the country from ‘positive’ to ‘stable’.
The change in ‘outlook’ for Cyprus is entirely due to the anticipated economic shock impact of Covid 19, and the mitigating measures which have been taken by the government. The fiscal support package introduced by the government is viewed as necessary to deal with the immediate economic consequences of the pandemic, but it has some adverse consequences. The package will undoubtedly result in a previously healthy fiscal surplus turning into a deficit, and, a reversal of the previous downwards trajectory in the level of public debt.
In its favour and supporting the BBB(low) rating, however, DBRS concurs with Fitch and Moody that Cyprus has a prudent public debt management framework, a good track record on fiscal deficit reduction, sustainable macroeconomic policies and a favourable business environment which is open to investment. Cyprus is regarded as having had the fiscal headroom to respond to the crisis and, whilst the 2.7% of GDP surplus present in 2019 is likely to be replaced by a 4.7% deficit in 2020, it is expected that the deficit will swiftly drop to just 0.4% of GDP by the end of 2021 . The economic shock introduced by Covid 19 has rendered the near- term growth outlook uncertain due to the impact on tourism in 2020. The timing and effects of the easing of ‘lockdown’ measures in Cyprus and its key markets of the UK, Russia, the EU, and Israel are significant ‘unknowns’ at present. However, the government forecast of a 6% GDP growth ‘bounce back’ in 2021 following a 7% contraction in the current year is not viewed as unreasonable. DBRS also acknowledges that off- shore gas reserves offer the potential to supplement long term economic growth.
A past area of concern for all ratings agencies has been Cyprus’ high level of public debt. Encouragingly, DBRS notes that, whilst the government debt ratio is set to increase from 95.5% to 116.8% in the short term, it is expected to reduce sharply to 103.2% in 2021 and then resume its previously downward trajectory. DBRS regards prudent debt management on the part of the Cyprus government as having produced a favourable debt profile that reduces refinancing risks. This is an observation supported by the easy success of recent government debt issues. Cyprus is viewed as benefitting from a stable political environment and strong institutions and, whilst lower service exports and reduced tourism levels will negatively impact the current account balance in 2020, this imbalance is viewed by DBRS as being containable.
In common, with Fitch and Moody, DBRS does sound a cautious note in respect of the level of non- performing exposures (‘NPEs’) within the Cyprus economy. The previously anticipated reduction of banks’ NPE levels in 2020, via the sale of NPE portfolios, is now uncertain. In the longer term, however, a return to focusing on NPE reduction is essential. As stated by all other ratings agencies, a return to a sustainable downward trend in NPEs would have a positive impact on Cyprus’ overall rating, whilst omitting to tackle the problem could have an adverse consequence.
Both the BBB rating and the R2 rating are an indication that Cyprus ‘issues’ are of good investment quality although the underlying economy is vulnerable to changing economic conditions. The fact that Cyprus has been able to maintain these rating levels, and equivalent ones with Fitch and Moody, is a welcome vote of confidence in the country.
For more information on this topic please speak with your usual contact at Elias Neocleous & Co LLC.