Latest positive ratings mark end of 2013 crisis, economists say

News of the island’s return to investment grade last week has been further bolstered by Moody’s Investor Service’s latest upgrade of the two largest Cypriot banks’ ratings.

Moody’s announced on 4 October that it has upgraded the ratings of Bank of Cyprus and Hellenic Bank, including their long-term deposit ratings to Baa3 from Ba1 and their Baseline Credit Assessments (BCAs) and Adjusted BCAs to ba2 from ba3. It followed news that Moody’s, as well as DBRS Morningstar, had upgraded the Cyprus economy bringing it back to investment grade for the first time in almost 12 years.

According to financial analyst Yiangos Hadjiyiannis and economist as well as Board Member at KPMG Cyprus Tassos Yiasemides, the upgrades are a reflection of the country’s improved credibility and credit profile. They both agree that this will help attract more foreign investment as the first thing investors look at when searching for a country to invest, is its credit ratings.

Here is what they had to say to InBusinessNews:

The Cyprus economy has been upgraded by Moody’s and DBRS Morningstar. What do these upgrades mean?

Yiangos Hadjiyiannis (Y.H.): The upgrades are a very positive development for the Cyprus economy and will open prospects and developments.

However, the positive effects will not be felt immediately, as the upgrade does not have a direct impact. We will start to see the results in the mid- to long-term. This is not something that will be felt by the general public immediately; it will take some time.

Tassos Yiasemides (Τ.Y.): The upgrade of the Cyprus economy is a positive development, as it improves the country’s credit profile and boosts its credibility. Hence, it is expected to encourage investments, given that investors take the international rating agencies’ ratings into serious consideration.

At the same time, it improves the country’s capabilities in potentially tapping the markets and this is particularly important, taking into consideration that Cyprus will have to refinance public debt of over two billion in 2024, as well as the current bonds market along with the increase of the cost of financing.

Furthermore, this upgrade reinforces the effort to maintain positive economic growth rates and surpluses, and low unemployment rates in a difficult economic environment, where most European economies are slowing, mainly due to monetary policy tightening.

It is noted, however, that the upgrade alone cannot resolve all the problems that society, but also the business community, are facing with the high cost of living, high rents, higher loan instalments and increased financing costs.

Would it be correct to say that the 2013 economic crisis in Cyprus is now a thing of the past?

Y.H.: These ratings mark the end of the 2013 crisis. Moody’s has kept Cyprus out of investment grade for the past 12 year; it was the last rating agency to have us in this category.

The upgrade is a very positive development in terms of the Cyprus economy’s credibility. Overall, it reinforces Cyprus’ profile and opens up new avenues, as it offers the capability to attract more foreign investments.

Τ.Y.: With the help of a prudent fiscal policy, but also through the restructuring of the financial sector, the Cyprus economy has managed to recover from the 2013 crisis.

The fact that the country was under the guidance of its creditors was possibly a facilitating factor. Furthermore, it is important to note that society, but also businesses, showed great resilience.

I believe that as a country, right now, we have “stronger” antibodies to fight off any possible negative developments, such as the spread of the coronavirus for example. A significant improvement is observed in public finances and the credit institutions’ balance sheets.

At the same time, the institutional framework was reinforced so as to avoid events such as those of 2013 to the extent possible. The economy is a “cycle” and extroverted economies like ours are vulnerable to external shocks. And so proper assessment and measure-taking is required to maintain the positive outlook of the economy.

A big challenge, which has also been mentioned by the rating agencies, is the green transition as well as the technological upgrade of public sector procedures through the absorption of funds available under the Reconstruction Fund. Keeping to the European Commission’s requirements is particularly important when it comes to absorbing these funds.

How important is it for the government to implement the recommendations of the rating agencies?

Y.H.: The fact that Cyprus has been upgraded should not make us complacent. It is not the “end of the road”, we need to be extremely careful. We need to ensure that the Cyprus economy continues to be upgraded. To ensure this, we must implement the recommendations so that the Cypriot economy remains resilient.

In other words, we should hold on to the upgrade as a positive element for the Cyprus economy, but we must not under any circumstances rest assured. We need to continue with our plans for further upgrades.

T.Y.: In the majority of cases, the rating agencies’ recommendations align with those of the European Commission and the estimations of the Finance Ministry itself. The common recommendations are for prudent management, continuation of growth and surpluses, constant monitoring of developments in the financial sector, maintaining strong capital adequacy and liquidity ratios, and promoting reforms to ensure the country is competitive.

Therefore, the government must take the rating agencies’ recommendations extremely seriously, given that beyond what was mentioned above, the downgrades are given much easier than the upgrades.

It is worth remembering that one of the reasons the country was driven to the Memorandum in the last crisis was that it was blocked from the international markets following the rating agencies’ downgrades, that ranked the country in the junk category.

Following the upgrades, certain political parties have suggested horizontal social support measures. Is this approach recommended?

Y.H.: I would not recommend any horizontal support measures. I believe it is necessary for a state to have a social protection net for the vulnerable groups, but for this to be done with targeted measures and always based on the facts and figures. Furthermore, I believe that the measures should be flexible, that is, so they can be changed depending on the economic and social conditions.

The government must support and help those who need it. But always ensuring that it doesn’t put the country’s finances at risk.

Τ.Y.: The international agencies’ ratings are not static but constant. Beyond the significant improvement of public finances that has been observed in the past few years, Moody’s have also examined the draft state budget for 2024, which is essentially moving in a similar direction with previous years, that is, of a strong economy with surpluses.

The Governor of the European Central Bank, the European Commission and the rating agencies are against horizontal measures, as on the one hand they negatively impact on public finances and on the other, they may push prices and inflation up through increased demand and consumption.

We could have a series of targeted measures to boost the economy however, similar to those that were recently announced by the government of Greece, to help the citizens in their day-to-day lives, and to enhance social cohesion as well as business activity.

Following the upgrades, the President of the Republic stated that returning to investment grade will open prospects and opportunities. What are these prospects and opportunities?

Y.H.: Indeed, the upgrades could open prospects and opportunities, which primarily have to do with Cyprus’ profile, its credibility and attracting investments.

The first factor that investors look at when planning to invest in a country is the country’s creditworthiness ratings.

Seeing that the Cyprus economy has been upgraded, this means we have a better reputation abroad and among investors, as well as more opportunities. The upgrade means we have a better reputation and more possibilities to attract good investments (foreign, private).

Τ.Y.: The prospects and opportunities are created through the proper use of the positive rating and the Cyprus economy’s return to investment grade by all the rating agencies.

Proper organisation and the strategic utilisation of the positive development, and promoting Cyprus as an investment – but also headquartering – destination for important corporations from abroad, are a must. Investors and businesses take the ratings into serious consideration before deciding to make any business moves.

Furthermore, the state must, though its policies, reinforce the country’s productive branch, so as to boost investments and business activity in a difficult environment with significant challenges, such as monetary tightening and high energy costs.

(Source: InBusinessNews)