Frankfurt am Main, August 19, 2022 — Moody’s Investors Service (“Moody’s”) has today changed the outlook on the Government of Cyprus’ Ba1 ratings to positive from stable and has affirmed the long-term foreign-currency and local-currency issuer and the local-currency senior unsecured ratings at Ba1. Concurrently, Moody’s has also affirmed the foreign-currency and local-currency senior unsecured medium-term note (MTN) program ratings at (P)Ba1. The local-currency commercial paper and other short-term ratings have been affirmed at Not Prime (NP) and (P)NP respectively.
Moody’s decision to change the outlook on Cyprus to positive reflects the following key drivers:
1) Strong reduction in Cyprus’ public debt ratio this year which Moody’s expects to continue in the coming years, following a reduction of more than ten percentage points of GDP last year Cyprus’ already favorable debt affordability metrics will likely improve further, helped by a favourable debt structure and long maturity of the debt;
2) Stronger-than-expected economic resilience to Russia’s invasion of Ukraine (Caa3 negative) and also to the pandemic, coupled with solid medium-term GDP growth prospects, which in turn are supported by the EU’s Next Generation EU package of grants and loans. In the first half of the year, real GDP growth was at 6%, among the strongest performances in the euro area;
3) Ongoing strengthening of the banking sector, with non-performing exposures continuing to decline. Also, the banking sector’s exposure to Russia is limited, in stark contrast to the early 2010s.
The affirmation of the Ba1 ratings reflects a combination of comparatively high economic and institutional strength and relatively high exposure to event risks related to the large size of the banking system.
Cyprus’ local and foreign currency country ceilings remain unchanged at A1. For euro area countries a six-notch gap between the local currency ceiling and the local currency rating as well as a zero-notch gap between the local currency ceiling and foreign currency ceiling is typical, reflecting benefits from the euro area’s strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also reflects Moody’s view of de minimis exit risk from the euro area.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE FROM STABLE
FIRST DRIVER: STRONG REDUCTION IN DEBT RATIO AND FAVOURABLE DEBT AFFORDABILITY
The first driver for the change of the outlook to positive is Cyprus’ improving debt and fiscal metrics. A solid economic recovery in 2021 allowed a reduction of the fiscal deficit by four percentage points to 1.7% of GDP. Combined with the government’s reduction of its cash buffer, this led to a rapid decrease of the debt-to-GDP ratio by more than ten percentage points of GDP to 103.6% from 115% of GDP a year earlier.[1]
Moody’s expects that Cyprus’ public debt burden will continue to trend down rapidly in the coming years, and currently forecasts a debt ratio of around 88% of GDP in 2023; if achieved, this would be the lowest debt level for Cyprus since 2012. A combination of strong fiscal consolidation, solid nominal GDP growth and a further reduction of the cash buffer ? which stood at about 11.5% of GDP as of June 2022 – will be the main drivers of the debt reduction, which would be one of the strongest among similarly rated peers.
Moody’s believes that fiscal risks emanating from high inflation are relatively low. So far, the government has deployed relatively small, targeted and temporary support measures to shield households and businesses from the material increase of energy prices. Additional spending on inflation-related subsidies or other spending decisions might take place as the presidential elections scheduled for 5 February 2023 draw closer. However, in Moody’s view the government has significant fiscal room given very strong fiscal performance in the first half of 2022.
While Cyprus’ debt ratio remains significantly above peers at the Ba1 rating level, Cyprus’ debt affordability metrics are among the strongest compared to peers. Debt interest payments relative to government revenues ? Moody’s key ratio to measure the affordability of the debt ? were at 4.3% in 2021, and Moody’s expects a further decline to 4% and 3.6% in 2022 and 2023 respectively. This compares to a ratio of over 9% in 2012.
Moody’s expects this improvement despite rising government bond yields as the European Central Bank (ECB) tightens monetary policy. The Cypriot government benefits from a favorable debt structure with no floating rate or foreign-currency denominated debt, a very low share of short-term debt and a relatively long weighted average debt maturity of 7.7 years as of end-June 2022. In this context, the government still refinances maturing debt at lower cost while the sizeable cash buffer allows the government a high degree of flexibility with regards to funding.[2] The government’s cash reserves are almost three times above its minimum objectives.[3]
SECOND DRIVER: STRONGER-THAN-EXPECTED ECONOMIC RESILENCE AND SOLID MEDIUM-TERM GROWTH PROSPECTS
The second driver for the outlook change to positive is the stronger-than-expected resilience of the Cypriot economy in combination with solid medium-term GDP growth prospects. Contrary to earlier expectations the Cypriot economy has proven to be resilient to Russia’s invasion of Ukraine in late February.
In 2021, 27% of tourist arrivals originated from Russia and 5% from Ukraine, raising concerns over a significant slump in the important tourism industry this year.[4] The sector directly and indirectly accounts for 13.7% of GDP (2019 data) according to the World Travel & Tourism Council. However, the tourism sector recovered strongly, with the number of tourists up by 258% in the first half of the year compared to a year earlier, helped by the authorities’ successful campaign to attract tourists from other countries, higher spending by tourists and a general recovery of tourism amid high pent-up up demand.
Moreover, the economy as a whole also recovered well from the pandemic shock, with GDP reaching the pre-pandemic level already in 2021, as non-tourism related services stabilized the economy during the pandemic and the authorities’ effective support measures mitigated the impact of the shock on the supply side of the economy.
In its baseline scenario, Moody’s now forecasts real GDP growth for Cyprus of 4.8% this year and 2% in 2023 respectively, which would be higher than the euro area average at 2.2% in 2022 and 0.9% in 2023. Real GDP growth for the first six months of this year has been very solid at 6%, exceeding the euro area average by more than two percentage points.
Besides travel, the Cypriot economy has limited exposure to Russia via trade in financial and other business services, while energy imports from Russia are very low at only 1.7% of its energy mix, much lower than the EU average of 24.4%.[5] While Russia accounts for around a quarter of the stock of foreign direct investment in Cyprus, net flows have been negative in recent years and the real estate market ? a large component of Russian investment ? has not been materially affected by the loss of Russian buyers.
Over the medium term, the growth outlook for Cyprus is solid with potential growth estimated by Moody’s to be in the range of 2.5-3.0%. Economic growth will be supported by the ongoing reforms and investment projects in the context of the European Union’s (EU, Aaa stable) Next Generation EU investment package and Cyprus’ implementation plan, the so-called National Recovery and Resilience Plan (NRRP). Reforms and investments are focused in the areas of energy efficiency, electricity market, circular economy, anti-corruption and transparency, financial sector and public administration, digital skills and audit and controls. Key deliverables under the NRRP in 2022-2023 include reform of the public sector administration, establishment of the anti-corruption framework and the reform of the justice system. Cyprus will receive grants and loans amounting to 5.2% of GDP over 2021-2026, most of it in the form of grants.[6]
THIRD DRIVER: ONGOING STRENGTHENING OF THE BANKING SECTOR
The third driver for the change in outlook to positive is the continuing improvements in the banking sector’s health. Non-performing exposures (NPEs) have dropped to below 10% of total loans and in Moody’s view will continue to improve as banks pare back legacy problem loans through a combination of resolution and sales, which is credit positive for banks.
At the same time, capital levels are solid and the banks’ funding and liquidity positions are strong, with banks relying predominantly on stable domestic deposits for their funding. Banks’ robust liquidity buffers will be supported by the ongoing asset sales and limited lending growth, which was recently outpaced by deposit growth.
Also, the banking sector’s exposure to Russia is limited, in stark contrast to the early 2010s. Russia accounted for only around 3.8% of banks’ liabilities (mostly deposits) at the end of 2021, while exposure on the asset side was even lower.
RATIONALE FOR AFFIRMING THE RATINGS AT Ba1
The rating affirmation takes into account Cyprus’ high economic and institutional strength compared to most similarly-rated peers.
Cyprus’ GDP per capita at $45,034 in purchasing power parity terms [7] is more than three times higher than the median for Ba1-rated sovereigns, and trend GDP growth of 3.1% over 2017-2026 is also stronger than peers. Trend growth has materially increased from about 0.5% a decade ago because of improvements in the economy’s competitiveness, which were supported by the implementation of a wide range of reforms under joint European Stability Mechanism (ESM, Aaa stable)/IMF support program. Moody’s assessment of economic strength also takes into account the relatively small size of the Cyprus’ economy and high volatility in economic growth.
In addition, the strong institutional capacity and effective policymaking supports the credit profile of Cyprus, as recently demonstrated by the country’s robust management of the coronavirus pandemic, with one of the lowest mortality rates in the EU. As mentioned earlier, Cyprus’ fiscal metrics balance a comparatively high debt burden with favourable debt affordability metrics.
Against these strengths, Moody’s considers the risks emanating from the banking sector to remain relatively high. While the underlying credit strength of the domestic banking system has materially improved in recent years, reducing the risks of a systemic banking crisis, the banking sector’s size at 225% of GDP [8] as well as the household sector’s relatively high debt levels and weak net asset position remain a concern in the context of rapidly rising interest rates.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Cyprus’s ESG Credit Impact Score is neutral to low (CIS-2), reflecting moderately negative exposure to environmental risks and neutral to low exposure to social risks and governance risks. Its overall E issuer profile score is moderately negative (E-3), reflecting chronic water shortages (though they are being addressed with desalinization plants) and an exposure to rising global temperatures. While the country’s geographic location positions it well to benefit from renewable energy, it remains below the EU average in terms of the share of renewable energy in gross final energy consumption. It is currently reliant on imported liquid fuels such as diesel and fuel oil, though it is developing a natural gas sector following gas finds in the Aphrodite field.
Moody’s assesses its S issuer profile score as neutral to low (S-2), reflecting low exposure to social risks over most categories. The only categories that entail moderately negative risk are demographics, labour and income, in line with many other European countries. For example, Cyprus has a relatively high youth unemployment rate. Analysis from the European Commission indicates that pension expenditures in particular will increase materially over the coming decades.
Cyprus’s institutions and governance strength is reflected in a neutral to low profile score (G-2).
GDP per capita (PPP basis, US$): 45,034 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 5.5% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.8% (2021)
Gen. Gov. Financial Balance/GDP: -1.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -7.2% (2021) (also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa2
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 16 August 2022, a rating committee was called to discuss the rating of the Cyprus, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Cyprus’ rating could be upgraded if the sovereign’s fiscal and debt metrics improved broadly in line with Moody’s baseline scenario over the coming 12 months. Continued evidence of strong economic resilience coupled with a high absorption of EU funding and reform implementation of reforms under the NRRP would also support an upgrade. Further improvements in the banking sector, which would reduce the sovereign’s exposure to banking sector risks, would also be rating positive.
WHAT COULD CHANGE THE RATINGS DOWN
The positive outlook signals that the rating is unlikely to be downgraded in the near time. However, the outlook would likely be returned to stable if Cyprus’ economic performance turned out materially weaker than expected by Moody’s. A sustained, material deterioration of the government’s fiscal position would also be credit negative, as would a material deterioration of the banking sector’s health.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
REFERENCES/CITATIONS
[1] Eurostat 12-Aug-2022
[2] Public Debt Management Office, European Central Bank, Eurostat 12-Aug-2022
[3] Ministry of Finance, Public Debt Management Office 12-Aug-2022
[4] CYSTAT 12-Aug-2022
[5] Eurostat 12-Aug-2022
[6] European Commission, Recovery and Resilience Scoreboard,
https://ec.europa.eu/economy_finance/recovery-and-resilience-scoreboard/index.html 12-Aug-2022
[7] IMF/World Economic Outlook 12-Aug-2022
[8] Central Bank of Cyprus, CYSTAT 12-Aug-2022
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Heiko Peters
Vice President – Senior Analyst
Sovereign Risk Group
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
