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  • Ilma Danielienė

Fitch Ratings affirms Cyprus at Outlook Stable

Updated: Apr 7, 2021

Fitch Ratings has affirmed Cyprus's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.

Frankfurt am Main, Germany: 26 March 2021

Fitch Ratings provides the following details:

The rating of Cyprus reflects its institutional strength as underlined in its per capita GDP and governance indicators that are in line with the 'A' median and well above 'BBB' peers' and a record of robust economic growth and sound fiscal policy prior to the Covid-19 shock. These strengths are balanced by balance-sheet weaknesses, in particular high public debt and a weak banking sector.

The pandemic led to a deep recession in 2020, as for many rating peers. GDP contracted 5.1% in 2020 versus the 'BBB' median contraction of 6.9% and an average 4.6% growth in the previous five years. Tourism was hit particularly hard, as tourist arrivals and tourism revenues fell 85% in 2020, driving the 17% fall in exports of goods and services.

Fitch forecasts growth to recover to 3.5% in 2021 and 4.3% in 2022, broadly in line with the eurozone dynamics, and driven by pent-up consumption demand. The recovery will likely gain momentum only in 2H21, delayed by the recent wave of the pandemic. There is high uncertainty regarding tourism in 2021, given its dependence on arrivals from western European countries where vaccination had a slow start and travel restrictions are expected to be lifted only gradually. Growth will be supported by EU Next Generation funds. Cyprus has EUR1.2 billion (5.5% of GDP) in grants from the Resilience and Recovery Facility for 2021-2026. The government intends to front-load the spending of these funds, although plans are not finalised.

The budget deficit was 5% of GDP in 2020 according to preliminary figures, compared with persistent underlying budget surpluses pre-pandemic, which reached 1.5% in 2019. The deficit reflected pandemic-related expenditure and the decline in revenues due to the recession. The 2021 budget was adopted in Parliament on 21 January 2021, after a delay for political reasons, and the authorities expect that the budget deficit will be around 2.7%-3% of GDP.

Fitch forecasts a budget deficit at 3.6% of GDP in 2021 and 2.5% in 2022. The narrowing of the deficit is expected to be mainly cyclical, as substantial structural fiscal consolidation is not expected until 2022. The European Commission extended the suspension of its fiscal rules to 2022 and its latest guidance encourages eurozone members to support the recovery and focus on addressing the short-term consequences of the pandemic.

Gross general government debt (GGGD) surged to 118% of GDP in 2020, exceeding the 109% peak in 2014 and well above the 'BBB' median of 53%. The 24pp increase (almost twice the 14pp increase in eurozone) was only partly due to fundamentals driven by the pandemic, as cash buffers were increased significantly to over 15% of GDP as the sovereign took advantage of benign financing conditions. Fitch forecasts the debt ratio to decline by more than 10pp of GDP in 2021, predominantly as cash reserves are used for debt redemptions. Debt reduction will be driven by policy tightening from 2022 and GGGD is forecast to fall below 100% in 2025.

The large banking sector remains a weakness relative to 'BBB' peers despite a significant fall in non-performing exposures (NPEs) during 2020. Fitch's Banking System Indicator (BSI) for the highly concentrated banking sector remains among the weakest among rated-sovereigns, at 'b'. NPEs declined to EUR4.7 billion (16.7% of total loans) by end-2020 from EUR8 billion at end-2019, due mainly to asset sales and write-offs by the two largest banks. The coverage ratio of the remaining NPE stock is 44%, in line with the eurozone average.

The government is planning a scheme to facilitate the sale of some mortgage NPEs to the state-owned asset management company, Kedipes. This could lead to further significant NPE declines, but details, including potential fiscal costs, are not yet finalised and it is not included in Fitch's forecasts. NPEs could increase in 2021 as the pandemic-related loan moratorium, which covered around half of performing loans, expired for most loans at end-2020.

The current account deficit (CAD) had widened before the pandemic to 6.3% of GDP in 2019 due mainly to strong import growth. The impact of the pandemic on tourism led to a further deterioration in the CAD, which is estimated to be close to 10% in 2020. The surplus on net services in the current account was 20% of GDP in 2019 and had grown by a cumulative 26% since 2014, highlighting the importance of the tourism sector. Fitch forecasts CAD to remain above the pre-pandemic level and exceed 8% of GDP in 2021 and 2022.

ESG - Governance: Cyprus has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Cyprus has a WBGI ranking at the 76th percentile, reflecting strong regulatory quality, well-established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.”

According to Fitch Ratings, the main factors that could, individually or collectively, lead to positive rating action/upgrade are:

  • Public finances: Evidence that public debt/GDP will return to a firm downward trend over the medium term following the sharp increase in 2020, supported by a reduction in contingent liabilities from the banking sector;

  • Structural: Progress in asset-quality improvement in the banking sector, consistent with lower impairment charges and enhanced credit provision to the private sector;

  • External: Reduced vulnerability to external shocks, for example stemming from a narrowing in the CAD;

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Public finances: Failure to return public debt/GDP to a declining path, for example due to structural fiscal loosening, weak growth or materialisation of contingent liabilities;

  • Structural: Heightened risks in the banking sector, for example from substantial deterioration in asset quality.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LTFC IDR by applying its QO, relative to rated peers, as follows:

  • “Structural features: -1 notch, to reflect significant banking-sector weakness, including the high, but declining, NPEs that could pose contingent liability risks to the sovereign and lead to macro-stability risks.

  • External: -1 to reflect the history of external and banking crisis, a large share of non-resident deposits and the lack of diversification of external revenues, reflected in the high weight of tourism in exports.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LTFC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM”.

Key assumptions provided by Fitch experts:

“Fitch expects a strong global rebound after the deep recession in 2020 based on its latest Global Economic Outlook published on 17 March. Eurozone GDP is expected to grow 4.7% in 2021 and 4.5% in 2022.

Gross government debt-reducing operations such as future privatisations or asset sales by the state-owned asset management company are not considered in Fitch's baseline scenario. Our projections also do not include the impact of potential future gas reserves off the southern shores of Cyprus, the benefits of which are several years into the future.

Peace talks, convened by the UN, will restart between Greek and Turkish Cypriots in April 2021 after they broke down in 2017. The negotiations could lead to a formal conference on reunification, though substantial progress is not included in Fitch's baseline scenario. The reunification would bring economic benefits to both sides in the long term but would entail short-term costs and uncertainties”.

Fitch Ratings provides the following ESG considerations:

  • Cyprus has an ESG Relevance Score of 5 for Political Stability and Rights as WGBI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

  • Cyprus has an ESG Relevance Score of 5 for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as WGBI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

  • Cyprus has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as WGBI have the highest weight in Fitch's SRM and are relevant to the rating and are a rating driver.

Cyprus has an ESG Relevance Score of 4 for Creditor rights as willingness to service and repay debt is relevant to the rating and is a rating driver.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit

Navigator Consulting provides Investment Advisory, Strategic Management and support for small and medium enterprises in Cyprus, Greece and internationally.

For further information, please contact:

Philip Ammerman

Managing Director


Fitch Affirms Cyprus at ‘BBB-‘; Outlook Stable

FitchRatings. 26 March 2021

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