Mar 28, 2015

CYPRUS: Standard and Poor’s raises outlook to ‘positive’

Standard and Poor’s (S&Ps) has revised the Cypriot economy’s outlook to ‘positive’ from ‘stable’, maintaining the economy’s “B+/B” rating based on a faster than expected reduction of the general government debt, supported by less adverse economic growth prospects than before.

The government welcomed the S&P decision with Deputy Government Spokesman Victor Papadopoulos saying on Saturday that “it is important for the outlook of the Cypriot economy to be rated as positive by the particularly strict rating agencies that are also important for the international markets.”
He said that “it is the duty of all of us not only to safeguard this positive outlook but also to strengthen it, collectively and responsibly.”
The rating agency estimates that following the €10 bln economic adjustment programme concluded with the Troika of international lenders in March 2013, the Cypriot economy will bottom out in 2015 and then slowly strengthen, based on a resilient business services sector, a solid tourism sector, and gradually recovering private consumption.
However, S&P warns that “investment growth will remain negative, as the process of deleveraging by domestic banks continues.”
S&Ps estimates that the general government position was at close to balance in 2014 (-0.3% of GDP), excluding statistical accounting for the costs related to the recapitalisation of the cooperative banking sector, which all implies a substantial budgetary improvement.
“As a result of the government’s past and expected budget deficit reductions and a gradual recovery in economic growth over 2015-2017, we expect the general government balance will average about -0.7% of GDP over 2015-2017, compared with our previous projection of -2.4% of GDP,” the agency said.
Acknowledging that its projections are subject to uncertainty, due to various potential shocks to Cyprus’ small, open, services-based economy, the agency notes that the economy will begin growing again in 2015, for the first time since 2011.
S&P’s cites the depreciation of the Russian rouble and the expected contraction of the Russian economy, alongside the EU sanctions imposed on several large Russian commercial banks and companies, as the factors which may weigh on the prospects in key sectors, including tourism and business services.
“Still, despite an estimated 4% decline in nominal GDP growth last year, Cyprus’ budget deficit narrowed by nearly two percentage points of GDP to about 3% of GDP, to below the outcomes we expected for many eurozone economies that saw positive growth,” the agency added.
S&P said that financial stability continues to remain a key risk as the banks’ asset quality deterioration continue and non-performing loans (NPLs) amount to almost 55% of total assets in November 2014.
“Although the new legislation regarding foreclosures and insolvency procedures adopted this year could improve conditions, the outcome is still uncertain,” S&P said, adding that “we continue to consider that the economic adjustment program’s €1 bln financial sector support buffer provides the government with leeway to address financial sector stability risk.”

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