Fitch rating agency has changed the outlook for Cyprus to stable from positive, citing the impact of the coronavirus pandemic on the Cypriot economy and on Cyprus’s fiscal position.
In a rating action issued on Friday, Fitch affirmed Cyprus’ Long term rating at ‘BBB-‘.
“The outlook revision reflects the significant impact of the global COVID-19 pandemic on Cyprus` economy and on the sovereign`s fiscal position,” Fitch said.
The agency forecasts a GDP contraction of more than 2% in 2020 “reflecting the material negative impact of the health crisis on the global economy.”
Fitch noted however, that “risks to this baseline forecast are tilted firmly to the downside, as it assumes that the coronavirus can be contained in 2H20, leading to a relatively strong economic recovery in 2021.”
“In the event of a second wave of infections and the widespread resumption of lockdown measures, economic outturns would be significantly weaker for 2020 and 2021,” Fitch said.
According to Fitch, “the recession and the economic policy response to the COVID-19 pandemic will result in a sizeable deterioration of the budget balance this year.”
With regard to the support measures announced by the government, Fitch said that while details had not been finalised by 1 April, “fiscal easing, including extra healthcare expenditure, lower social security contributions and subsidies for job protection to lead to a budget deficit around 1% of GDP in 2020 compared with the 2.8% of GDP budget surplus in 2019.”
Furthermore, the agency added that despite favourable trends in the gross general government debt (GGGD) to GDP ratio which amounted to 95.5% in 2019, the GGGD to GDP ratio to increase somewhat in 2020 due to the combination of the economic recession and budget deficit.
“Moreover, the risk of materialisation of contingent liabilities into the sovereign balance sheet remains a risk, given the financial system`s still fragile position and downside risks to the economic outlook,” Fitch added.
According to Fitch, the Cypriot economy`s demonstrated flexibility, illustrated for example by the fall in unemployment to close to pre-crisis level to drive the recovery after the severe short-term shock.
But it pointed out that “the GDP growth forecast is highly uncertain in 2021, but afterwards it is expected that the GDP growth will gradually converge to 2% medium term growth potential, unchanged since the last rating review.”
On Cyprus’ market access, Fitch noted that the government has built a track record of capital markets access with increasingly favourable yields, pointing out however that “financing needs in 2020 could increase further depending on the extent of the fiscal impact of the health crisis.”
According to Fitch, the banking sector “remains a weakness relative to `BBB` peers due to the exceptionally weak asset quality and high NPE ratios that still weigh on capital, in particular capital at risk from unreserved problem assets, and profitability.”