Moody’s rating agency has upgraded the outlook on the Cyprus government bond rating to positive from stable.
Moody’s notes that the key drivers for the positive outlook change are the improvement in economic resilience that have been observed over the past year and Cyprus consistent fiscal outperformance which indicates a more rapid reversal in the public debt ratio than expected.
Concurrently, Moody’s has maintained the local-currency and foreign-currency bond ceilings at Baa1. The local-currency and foreign-currency deposit ceilings remain unchanged at Baa1. The short-term foreign-currency bond and deposit ceilings remain unchanged at P-2.
Although we expect, says Moody’s, asset quality to improve in 2017, helped by the approved foreclosure and insolvency framework in 2015, we expect that bank asset quality metrics will remain weak for years to come.
Cyprus also has high public sector debt levels relative both to GDP (at 107.5% in 2015) and to revenue (at 275% in 2015). Whilst debt trajectory is reversing, the decline in debt is expected to be slow.
Offsetting that, Cyprus debt remains highly affordable, reflecting the very large share of official sector creditors in the total debt stock (63% as of the third quarter of 2016). Interest charges took up only 7.2% of general government revenue in 2015, down from a peak of 8.5% in 2013, and this is expected to fall further over the coming two years.
The agency believes that the prevailing low interest rate environment, and the liquidity buffer that covers debt repayments for the next year, mitigate liquidity risks effectively. Moreover, it expects fiscal discipline to be sustained in spite of the ending of Cyprus programme with the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) in March 2016, which should support investor confidence.