The rating agency maintained its outlook citing the risks that the Cyprus economy faces from the banks’ non-performing loans (NPLs) whose reduction is not “discernible”.

According to the latest report from Standard & Poor’s, “Cyprus’ economic recovery continues unabated, allowing for a reduction in general government debt”. It added, however, that “the impaired banking system still remains an important vulnerability”.

While Cypriot banks, which are struggling with a €20bn mountain of bad debt, roughly two fifths of their loan portfolio, are making efforts to reduce them via loan write-offs and restructuring and outsourcing to debt servicing companies, the reduction was slow, S&P said. While resorting to debt-to-asset swaps also helps reduce problematic loans, they do not lead to immediate cash inflows and banks.

“With the increasing use of this method, banks now have about 4.5% of their gross loans in real estate,” the rating agency said. “If loans to the real estate sector are included, the exposure to the sector rises to nearly 25% of gross loans.”

Standard & Poor’s, which upgraded Cyprus’ rating a year ago to a notch below investment grade, said thatwhile it expects economic growth to slow down this year to 3.2% from 3.9% in 2017, and to an average of 2.8% over the next three years, it could upgrade the rating in response to a reduction of its “unusually high” stock of NPLs allowing a convergence with credit and monetary conditions in the euro area.

The rating agency said that should “the economy’s external debt metrics improve further, particularly via a decline in its short-term debt burden,” and “the economic recovery and direction of macroeconomic policy provides impetus for further meaningful general government and private sector debt reduction,” it could also give Cyprus an investment grade rating.

“We could revise the outlook to stable if economic growth is significantly lower than we currently expect,” S&P said and added that it could do the same should fiscal relaxation made as a result of reduction of the ratio of public debt to economic output become doubtful over the next three years.

“We could also revise the outlook to stable if we saw risks emanating from greater economic concentration in certain sectors, for instance, construction or tourism, or if fresh concerns around financial stability emerge while the sector is still impaired,” S&P said.

Cyprus is rated non-investment grade by all major rating companies and is, as a result, ineligible to participate in the European Central Bank’s quantitative easing programme.

Commenting on the latest evaluation, Prodromou said that Cyprus has recorded remarkable improvement over the last few years with successive upgrades from all the credit rating agencies.

“We are just one step before the investment grade and despite the fact that the upgrade has not come now from this rating agency or others, there is still a one-year window,” he said.

He added that efforts should continue, particularly with the current initiative of the government and all political parties to seek ways to tackle the problem of non-performing loans, “to further help consolidate the portfolios of the lending sector”, Prodromou said, adding that “this will be key”.

“By maintaining stability and a sound economic policy, the government believes that upgrading to investment grade is a matter of time,” he said.

Source: Cyprus Mail