In its first ever ratings report on the island, German-based ratings agency Scope has assigned a BBB- sovereign rating with a stable outlook to the eastern Mediterranean island, citing its continued economic recovery and fiscal consolidation since the 2013 bail-out, a report by the agency made available on Saturday said.
However, Scope warned in its ratings report that a concentrated and externally-dependent economy presents risks to the stability and sustainability of Cyprus’ growth model, and subsequently its fiscal performance and financial stability.
It also said that the high stock of non-performing loans also continues to be a key credit weakness given the resulting vulnerabilities in the banking sector–weighing on profitability and constraining credit supply–and the risk it continues to pose to public finances in the context of a high public debt burden.
“Finally, high levels of public and private indebtedness combined with a vulnerable external position pose risks in the case of significant changes in market sentiment and a tightening of global financing conditions. The Stable Outlook reflects Scope’s assessment that the risks Cyprus faces are broadly balanced,” it said.
Scope said it expects real GDP growth, supported by sustained foreign investment and robust domestic demand, to average around 3 percent over 2019-21, relative to an actual growth of 3.5 percent in the first six months.
It said growth is expected to moderate and converge towards the country’s potential of 2-2.5 percent as investments gradually taper off and improved payment of debts reduces disposable income.
An estimated 15,000 households with a debt of up to 350,000 euros are expected to apply early in September to join a new scheme called “Estia” (house) so as to take advantage of a reduction by one third of the amount of their debt secured by their primary residence.
Depending on the final number of eligible households, the scheme is expected to take off the banks’ balance sheets up to 3 billion euros worth of non-performing loans, around one third of the value of bad loans, now standing at just over 10 billion euros.
Scope also turned to the political problems facing Cyprus, saying that any tension between Turkey and Cyprus remains a key geopolitical issue.