The international rating agency Fitch has affirmed Cyprus' long-term credit rating at 'BBB' with a 'stable' outlook, reflecting the island's institutional strength, strong economic growth and sound fiscal policy prior to the COVID-19 crisis.
At the same time, the agency noted that these strengths are balanced by weaknesses. In particular, high government debt and a weak banking sector.
Fitch projects Cyprus GDP growth of 4.8% through 2021, followed by a 3.7% recovery in 2022 and 2.9% growth in 2023, in 2020 it was a decline of a 5.1%.
Fitch noted that the economic recovery in Cyprus was stronger than in the Eurozone during the second and third waves of the pandemic in late 2020 and early 2021.
Tourism and domestic demand will support the recovery, although there is still uncertainty about the fourth wave of the pandemic and its impact on economic sentiment and air travel in the EU, the agency added.
By the way, growth will also be supported by Next Generation investments in the medium term, consisting of 1 billion euros in grants and 200 million euros in loans, as well as an additional 1 billion euros in the form of private investment.
Fitch also projects a budget deficit of 5.2% of GDP in 2021, a deficit in 2020 was 5.7%.
We expect a gradual reduction in the deficit from next year, which will reach 2.4% of GDP in 2023. It is expected that the reduction in the deficit will be caused by the termination of support measures for the pandemic, and until 2023 no significant structural fiscal consolidation is expected, based on EU recommendations, the agency noted.
As for Cyprus government debt, the agency said that general government gross debt rose to 119% of GDP in 2020, exceeding a peak of 109% in 2014 and well above the current 'BBB' median of 57%.
Although debt is still high, Cyprus continues to enjoy very favorable financing terms, Fitch added.
Fitch noted that the Cyprus banking sector still remains “a weak point in the country when compared to other countries with a similar credit rating.
The agency stressed that the volume of non-performing loans in the first half of 2021 decreased by 143 million euros to 4.6 billion euros, which amounted to 16.5% of the total amount of loans in the country. This was mainly due to the sale and write-off of assets by the two largest banks in Cyprus.
Finally, Fitch stated that the borrower's behavior in relation to loan repayment is encouraging, but “risks of deterioration of the situation still persist”.
Improving the quality of banks' assets depends on the conclusion of large deals on non-performing loans (NPE), - concluded in Fitch.