DBRS has affirmed the long-term foreign and local currency credit rating of Cyprus at BBB (low) and reversed the trend from positive to stable. The short-term rating of the issuer in foreign and national currency was confirmed at R-2 (medium), and the outlook was changed from positive to stable.
A fresh DBRS report notes that the coronavirus pandemic continues to pose challenges and uncertainty to the country's economic and fiscal outlook. However, the agency considers Cyprus' relative economic performance and health improvement to be positive. In addition, despite the importance of tourism-related activities, the Cyprus economy has proven to be more resilient than expected, creating the conditions for sustained growth over the medium term.
DBRS also mentioned a significant reduction in new non-performing loans in the country's banking system in 2020 and a change in asset quality today. At the same time, the agency stressed that the volume of old non-performing loans is still at a high level. In addition, the emergence of new problem assets is not ruled out as government support ends.
The BBB (Low) rating is driven by Cyprus' prudent public debt management, its good track record of deficits, its Eurozone integration that fosters sustainable macroeconomic policies, and its openness to investment that fosters an enabling environment.
However, Cyprus also faces significant credit problems associated with large problem loans in the banking sector and the economy: high levels of private and public debt, external imbalances and a small service-based economy, which puts Cyprus at risk in an unfavorable external environment of demand.
By the way, the ratings can be raised with stable economic growth and an improvement in the budget position, which will again lead to a steady trend towards a decrease in the public debt ratio. Also, if progress continues in reducing old problem loans from banks and strengthening the banking sector. A return to a sustainable trend could occur if the economic recovery is significantly softer than expected. However, the ratings could turn negative during periods of significantly weak growth coupled with large fiscal imbalances.