Fitch upgrades rating of Cyprus' economy to BB-

Fitch Ratings has upgraded Cyprus’ long-term foreign and local currency Issue Default Ratings (IDRs) by one notch to BB- from B+, the agency announced on Friday.

“The issue ratings on Cyprus’ senior unsecured foreign and local-currency bonds have also been upgraded to BB- from B+. The Outlooks on the long-term IDRs are positive. The Country Ceiling has been upgraded to BBB- from BB+ and the short-term foreign and local currency IDRs have been affirmed at B,” Fitch says in a press release.

According to the ratings agency “Cyprus is continuing to make strong progress in its adjustment following the 2013 banking crisis.”

“Its exit from the EU and IMF program in March took place in a context of out-performance of fiscal and economic program targets, success at lifting capital controls, and steps taken to restructure the banking sector,” the press release adds.

“The economic recovery, now into its second year, is supporting employment, bank asset quality adjustment, and public finances,” Fitch points out.

Positive results of tourism

Fitch is projecting “GDP growth of 2.9% in 2016 (from 1.9% projected a year earlier). It refers to the positive results of tourism and the drop recorded in unemployment.

“For 2017-2018, GDP growth of around 2.5% will benefit from an expected increase in foreign direct investment,” it says.

“Downside risks to the outlook stem from banking sector deleveraging and the weak external environment,” the ratings agency warns.

Referring to the banking sector it notes that it “is gradually strengthening, evident in the pick-up in deposits and stable capitalisation.”

“Deleveraging is ongoing, with overall sector assets down to 3.7x GDP in June 2016 from almost 6x in 2009,” it says.

It adds that “the property sector remains illiquid but prices seem to be stabilising at around 30% below their 2008 peak.”

“Strengthened supervision, management and regulations are helping to slowly reduce the exceptionally large stock of non-performing exposures (NPEs) at 48% of total loans,” Fitch says also pointing out that the new foreclosure framework is in the initial phases of implementation.

According to the ratings agency “a strong track record of fiscal policy management provides confidence that authorities will remain committed to government debt reduction in line with fiscal targets.”

Fitch projects “government debt to decline to just over 100% of GDP by 2018 (still more than twice the projected ‘BB’ peer median) from a peak of 108.9% in 2015.”

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