Moody’s upgrades Cyprus to investment grade, up by two notches

Moody's placed Cypriot economy in the investment grade, upgrading it by two notches, to Baa2, from Ba1, while also revising its outlook from positive to stable. Moody's was the only major credit rating agency that still kept Cyprus in a non-investment grade. After this upgrade, all four major credit rating agencies (Fitch, Standard and Poor's, Moody's, DBRS) keep Cypriot economy in the same rating category. Concurrently, Moody's has also upgraded the country's senior unsecured medium-term note (MTN) programme ratings to (P)Baa2 from (P)Ba1 and has upgraded the commercial paper rating to P-2 from Not Prime (NP) and the other short-term rating to (P)P-2 from (P)NP. According to Moody's, the two-notch upgrade of Cyprus' ratings to Baa2 from Ba1 reflects broad-based, sustained improvements in its credit profile because of past and ongoing economic, fiscal, and banking reforms. Significant private and public investments in combination with the implementation of further structural reforms in the context of NextGenerationEU (NGEU) support Moody's solid medium-term growth outlook. "Fiscal strength has also materially improved, and the economic and fiscal impact of the pandemic only temporarily interrupted the decline in the debt burden that Moody's expects to continue in the next few years", the US credit agency adds. The stable outlook balances these positive credit trends against remaining challenges, Moody's notes. According to them, these challenges include potentially slower progress in the implementation of investment and reforms related to Cyprus' National Recovery and Resilience Plan (NRRP) than Moody's currently assumes, remaining risks related to the banking system that could jeopardise the positive economic and fiscal momentum, and physical climate risks which Cyprus is exposed to, and which could undermine growth more than currently assumed. GDP growth at 2.3% in 2023 and 2.8% in 2024, steady reduction of debt level Moody's expects the economy to grow by 2.3% in 2023 and 2.8% in 2024. Moreover, Moody's expects Cyprus to grow at an average of 3.2% over 2025 to 2027 against the backdrop of significant ongoing foreign direct investment projects (FDI) as well as investments in the context of NGEU. The credit rate agency also forecasts fiscal surpluses of 1.6% of GDP in both 2023 and 2024, and an average surplus of about 1% over 2025-27. "Solid medium-term nominal GDP growth, sustained fiscal surpluses, and a drawdown of parts of the sizeable cash buffer will result in a fast reduction of debt-to-GDP", Moody's notes, adding that it expects debt-to-GDP to decrease from 86.5% in 2022 to 74% in 2024 and to below 60% in 2027. "Despite the European Central Bank's monetary policy tightening and the related significant increase in funding costs, Moody's expects Cyprus' debt affordability metrics to remain strong with interest payments in relation to revenues, near historical lows over 2023-27". Cyprus has no outstanding debt securities with floating rates, no foreign-currency denominated debt, a very low share of short-term debt and a long weighted average debt maturity of 7.5 years at the end-of August 2023, Moody's says, adding that the cash buffer, which was accumulated mainly during 2020 when interest rates were at very low levels, allows the government a high degree of flexibility in its funding strategy. Factors that could lead to a new upgrade According to Moody's, prospects of a faster than currently expected improvement in fiscal and debt metrics would put upward pressure on the rating. Particularly high absorption of EU funds and the effective implementation of reforms, in particular in the areas of the judicial system and control of corruption, would be also credit positive as the boost to potential growth could be more significant and strengthening of institutions and governance strength could be more material than Moody's currently assumes. A further reduction of the sovereign's exposure to banking sector risks, via a continued, sustained deleveraging of the banking sector in combination with a further improvement of the Cypriot bank's intrinsic strength would also be credit positive. Factors that could lead to a downgrade Downward pressure on the rating would stem from prospects of materially weaker economic performance than Moody's currently projects. "A sustained, material deterioration of the government's fiscal position leading to a jump of the debt burden and a material weakening of debt affordability metrics would also be credit negative", Moody's notes, adding that a material increase of banking sector risks would be credit negative. Banking sector The banking sector continues to strengthen in light of a decrease in leverage and improved credit profiles of Cypriot banks, according to Moody's. "The reduction in leverage and an improvement in liquidity and capital ratios have strengthened banks' credit profiles. Moreover, the profitability of Cypriot banks has strengthened materially over the past few quarters, closing the gap with European peers", it notes. Moody's expects a further, gradual deleveraging of the banking system and improved liquidity and capital ratios to be sustained over the next couple of years. Asset quality of Cypriot banks has also materially improved, and Moody's expects a further, but more gradual improvement over the next couple of years. The combination of resolution and sales of problem loans has materially reduced Cypriot banks' non-performing loans.

Source: Cyprus News Agency