By Stelios Orphanides
Standard & Poor’s has affirmed Cyprus’s BB+ sovereign credit rating and kept its outlook on positive citing the risks the economy faces from the banks’ non-performing loans whose reduction is not “discernible”.
“Cyprus’ economic recovery continues unabated, allowing for a reduction in general government debt,” the rating company said in a statement on its website on Friday. “The impaired banking system still remains an important vulnerability, however”.
While Cypriot banks, which are struggling with a €20bn mountain of bad debt, roughly two fifths of their loan portfolio, are making efforts to reduce them via loan write-offs and restructuring and outsourcing to debt servicing companies, the reduction was slow, Standard & Poor’s said. While resorting to debt-to-asset swaps also helps reduce problematic loans, they do not lead to immediate cash inflows and banks.
“With the increasing use of this method, banks now have about 4.5 per cent of their gross loans in real estate,” the rating company said. “If loans to the real estate sector are included, the exposure to the sector rises to nearly 25 per cent of gross loans.”
Standard & Poor’s, which upgraded Cyprus’s rating a year ago to a notch below investment grade, said that while it expects economic growth to slow down this year to 3.2 per cent from 3.9 per cent in 2017, and to an average of 2.8 per cent over the next three years, it could upgrade the rating in response to a reduction of its “unusually high” stock of non-performing loans allowing a convergence with credit and monetary conditions in the euro area.
Should “the economy’s external debt metrics improve further, particularly via a decline in its short-term debt burden,” and “the economic recovery and direction of macroeconomic policy provides impetus for further meaningful general government and private sector debt reduction,” it could also give Cyprus an investment grade rating.
“We could revise the outlook to stable if economic growth is significantly lower than we currently expect,” the rating company continued and added that it could do the same should fiscal relaxation made a reduction of the ratio of public debt to economic output doubtful over the next three years.
“We could also revise the outlook to stable if we saw risks emanating from greater economic concentration in certain sectors, for instance, construction or tourism, or if fresh concerns around financial stability emerge while the sector is still impaired,” Standard & Poor’s said.
Cyprus is rated non-investment grade by all major rating companies and is as a result ineligible to participate in the European Central Bank’s quantitative easing.