By Stelios Orphanides
Two economists said that, following Friday’s upgrade by Moody’s Investors Service, it is realistic to expect that Cyprus could see its credit rating upgraded to investment-grade through an upgrade from Standard and Poor’s (S&P) in the next 12 months, in line with the finance minister’s assessment.
S&P -which attributes Cyprus the highest credit rating after an upgrade in March to BB+, a notch below investment grade- could further upgrade the island’s sovereign credit rating “provided the remaining rating companies move along”, said Andreas Assiotis, chief economist at Hellenic Bank in an interview on Monday.
S&P apply a different methodology focusing “more on the macro, rather on the micro,” and as a result they swiftly downgraded Cyprus ahead of the 2013 crisis and were quick in upgrading Cyprus in the following years, Assiotis said. “However, what matters is not what the rating companies will do but what we will do to provoke an upgrade. The economy is growing but non-performing loan levels remain high”.
The latest rating assigned by Moody’s is Ba3, which is three grades into the junk-area, as is the BB- from Fitch Ratings and the BB (low) from DBRS. All rating companies said that further rating hikes are conditional to a further drop in non-performing loans which account for roughly half of the banks’ loan portfolio.
Finance minister Harris Georgiades, who was commenting in an interview on state-radio CyBC on Monday, said that he was confident that S&P would upgrade Cyprus in the next 12 months, adding that while recent upgrades show that Cyprus is on the right track, the government has to continue with reforms. The finance ministry expects the economy to expand 2.9 per cent this year and in 2018 after it expanded 2.8 per cent last year. The forecast is slightly more pessimistic than that of the University of Cyprus which last week said that it expected the economy to expand 3 per cent this year and 2.7 per cent in 2018.
“The upgrade of the Cyprus sovereign to investment-grade over the next 12 to 18 months is possible particularly by the S&P,” said Ioannis Tirkides, who heads Bank of Cyprus’s economic research and was also commenting in an interview. “This would depend on a reversal of the hitherto rising debt-to-GDP (gross domestic product) ratio, yet to be seen, and a material reduction in the level of non-performing loans in the banking sector”.
“Both are likely within a sustained growth environment and near-balanced budgets, as anticipated in the government’s medium term fiscal programme,” Tirkides said. “In the banking sector, the pace of decline of non-performing loans may be expected to accelerate over the next 12 months, bearing in mind that about 40 per cent of them are restructured and, in their large majority, meeting their newly scheduled repayments”.
Hellenic’s Assiotis said that the government, which achieved a fiscal surplus of 0.4 per cent of economic output last year and is expected to again post a fiscal surplus this year, which will enable a reduction of public debt to GDP ratio -of 107.8 per cent of the economy last year-, has already commenced with the repayment of public debt after it repaid earlier this month €0.3bn to the International Monetary Fund, out of the €1bn outstanding debt.
He said that since banks are stepping up their efforts to reduce their delinquent portfolio, -with Hellenic agreeing a cease-fire with bank workers union Etyk last week, allowing the smooth operation of APS Debt Servicing, tasked with managing the lender’s non-performing loans, and the Cyprus Cooperative Bank announcing the establishment of a similar unit with Spain’s Altamira- over the next 12 months there can be sufficient reduction in bad loans to justify an upgrade by S&P.
An upgrade to investment-grade raing by any of the four rating companies will allow Cyprus banks to participate in the European Central Bank’s (ECB) monetary operations and make them eligible for the ECB’s expanded asset-purchasing programme, which will further improve liquidity in the banking system, allowing the economy to enter a virtuous circle.