Cyprus closing in on first ‘A’ Fitch rating in 13 years

Good news is always welcome, but when it concerns the Cypriot economy and its performance, it is also extremely important, as it directly or indirectly affects everyone's lives.

Two such items of good news came on the eve of the elections from the international rating agency Fitch and after the elections from Standard & Poor's, which upgraded the country's credit rating from BBB to BBB+ and at the same time maintained the outlook of the Cypriot economy on a positive horizon.

The upgrades may be small-scale, because inflation and interest rates distract society's attention, and justifiably so, but it is a fact that Cyprus is now in the “waiting room” for Fitch and Standard & Poor's ‘A’ ratings.

As important as the upgrade is, just as important is the resounding message addressed to the country's politicians given that, 11 years after the zero point of 2013, the Cypriot economy still has a way to go in the face of the remnants that the crisis left behind.

NPLs and debt

These are remnants such as non-performing loans (mainly those outside the banking system), and private and public debt that remain high despite their significant reduction.

As Fitch aptly reminds us in its brief description of the Cypriot economy "the non-performing loan ratio was 7.9% at the end of 2023, the lowest level since the global financial crisis and from a peak close to 50%."

External observers/evaluators of the Cypriot economy constantly refer to the issue of divestments, a chapter that occupied the attention of the political scene of the country like no other except the Cyprus Problem.

As 2023 drew to an end, Parliament voted to implement a revised divestment framework, which Fitch expects will "strengthen the industry's resilience and help reduce non-performing loans."

And, Standard & Poor's makes special mention of the significant reduction in NPLs, noting however that their percentage of total loans in the banking system "remains higher than in other countries and is the highest in the EU."

It acknowledges, however, that the slowdown in NPL decline is related to the fact “that most have been concentrated in smaller banks that have struggled to sell portfolios due to size-related constraints.

In addition, the remaining non-performing loans are mostly mortgages, which, due to social incentives, are difficult to settle."

Regarding private debt, Fitch points out that weak credit demand and strong nominal economic growth led to further deleveraging.

According to data from the Central Bank of Cyprus, the household and corporate debt-to-GDP ratios fell to 67.9% and 140.4% in the third quarter of 2023, from 131% and 221.2% in the third quarter of 2023. of 2015 and is, as Fitch points out, very close to the EU average. Corporate debt, excluding special purpose entities (SPEs), is close to 88% of GDP.

13 years later

The Cypriot economy in June of this year returned to where it was in the summer of 2011. Cyprus was downgraded then, while today it has been upgraded.

These upgrades for Cyprus combined with the positive outlook leave the door open for the first time in almost 13 years for Cyprus to return to the ‘A’ category on the agencies’ ratings scale.

In particular, Fitch's upgrade on 8 June, 2024 brought Cyprus' rating back to the point it was on 10 August, 2011, and Standard & Poor's upgrade to the point it was after its downgrade in July 2011.

As the political scene tries to find its pace and recover from the passage of ‘Hurricane Phidias,’ Fitch and Standard & Poor's remind us how easy it is to fall and how difficult it is to get up again.

In this case, it took a full 13 years and counting.

(Source: InBusinessNews)