Fitch Ratings upgrades Cyprus to Investment Grade, following S&P

Fitch Ratings upgrades Cyprus to Investment Grade, following S&P

International ratings agency, “Fitch Ratings”, has upgraded Cyprus’ long – term credit rating to BBB- from BB+ assigning stable outlook, elevating the Cypriot economy to investment-grade after seven years in junk, on 19th October 2018. (

This follows Standard and Poor’s similar upgrade on Cyprus, last month in September (

Finance Minister Harris Georgiades, thanked everyone for their contribution, stating that Cyprus is “forging ahead” (

Fitch said that “Cyprus is benefiting from a strong economic recovery with real GDP reaching pre-crisis level and the economy forecasted by Fitch to grow 4 percent in 2018 and 3.8 percent in 2019, supported by large foreign-financed investment projects in construction and tourism, and robust private consumption”(

The international agency further stated that the upgrade reflected the buoyant fiscal revenue and prudent fiscal policy, which will see Cyprus record a fiscal surplus of 2.7 per cent of GDP in 2018, compared with a target of 1.7 per cent in the April 2018 Stability Programme Update.

Following the above, the agency added that it forecasts that the fiscal surplus will remain high at 2.4% and 2.2% of GDP in 2019 and 2020, respectively, compared with 3.1% and 2.9% targeted in the 2019 Draft Budgetary Plan (

It also noted that robust economic growth will boost fiscal receipts, while previously adopted hiring freeze and collective agreements will likely limit growth in the wage bill.

On parallel lines, the rating agency said that, despite a one-off expected increase in public debt following the placement into Cyprus Cooperative Bank (CCB) of EUR 3.19 billion in government bonds (15.5 per cent of GDP) to facilitate the acquisition of part of the state-owned bank by Hellenic Bank, the island’s public debt will remain on a firm downward trajectory(

Regarding the asset quality of the banking sector, Fitch also cited as a medium-effect reason for its upgrading the reduction of non-performing loans of the banking system to 30% at the end of September this year, relative to 44% in 2017(

Fitch also highlighted the important legislative amendments aimed at facilitating NPEs securitisation and sales of loans, as well as strengthening foreclosure and insolvency toolkits were adopted by the Cypriot parliament in July 2018 (–investment-grade-rating.html).

However it said that the banking sector was still vulnerable, with “very weak asset quality and high NPEs (non-performing exposures) ratios are still weighing on new lending and profitability” (

The international ratings agency also emphasized that additional fiscal costs could arise from potential calls on the government-guaranteed Asset Protection Scheme, covering unexpected losses on EUR 2.6 billion of Cyprus Cooperative Bank’s assets acquired by Hellenic Bank, whereas state subsidies related to the Estia scheme and increased debt servicing costs following government support to Cyprus Cooperative are estimated at a yearly 0.5% of GDP by the government and are already captured in our forecasts (

In the report, it is also noted that the private sector debt and non-performing exposures remain high, however, at 226% (excluding special purpose entities) and 97% of GDP in 1Q18, respectively, and constrain credit growth.

Continuing from the above, the household and corporate debt stood at 105% and 121% of GDP and a large part of the recent decline in such debt stemmed mostly from high GDP growth, debt-to-asset swaps, loan write-offs, rather than loan repayment.

Furthermore, Fitch is anticipating that private sector deleveraging will accelerate, however, as enforcement of new legal amendments, improving earnings and recovering house prices foster debt repayment.

Economic growth will likely remain resilient to a faster resolution in NPEs as rising wages, a dynamic labour market and high household savings will help preserve disposable income and smooth consumption (

As a final point, Fitch proclaimed that factors such as, materially reduced contingent liabilities to the sovereign stemming from the banking sector, marked reduction in the public debt to GDP ratio, and continued deleveraging of the private sector, are amongst the future developments that may lead to a positive action by Fitch.