This upgrade, according to the German agency, is attributed to Cyprus’s robust economic fundamentals, extremely favourable fiscal prospects, the positive trajectory of its public debt, and the improvement in the vulnerabilities of its banking sector. However, challenges persist for the Cypriot economy, as highlighted by Scope, such as its small and open economic structure, high levels of non-performing loans, and increased borrowing. Scope’s stable outlook reflects the agency’s opinion that Cyprus’s risks are balanced over the next 12 to 18 months. Moreover, Scope reaffirmed Cyprus’s short-term rating at S-2 with a stable outlook in both local and foreign currency.

The decision to upgrade Cyprus’s credit assessments to BBB+ from BBB, according to the agency, reflects the “very favourable trajectory of public debt, resulting in a steady decline in debt levels, supported by strong growth, resilient fiscal performance returning to surpluses as early as the end of 2022, and a commitment to sustained fiscal discipline”. What is more, Scope also mentioned that this upgrade reflects “better-than-expected economic performances, continuing to demonstrate resilience amid unfavourable external conditions and inflationary pressures, with stable medium and long-term growth prospects compared to peer countries, also supported by robust structural reform dynamics and public investments,” within the framework of the national reform programme and the Recovery and Resilience Plan.

Additionally, Scope attributed the upgrade to the continuous improvement in the financial sector, with a reduction in the overall size of the banking sector and a decrease in non-performing loans, even amidst the Covid-19 pandemic and the high cost of living, bolstering banks’ capital levels. However, the BBB+ assessment is limited by Cyprus’s characteristics, such as its small, open, and externally dependent economy, prolonged though improving vulnerabilities in the banking sector, reflected in still elevated non-performing loans, and its high sensitivity to fluctuations due to significant macroeconomic imbalances and high levels of private and public debt, combined with a weak external position.

The European Central Bank (ECB) accepted Scope Ratings on November 10, 2023, as a new external credit rating agency, making the German agency’s credit assessments acceptable based on the ECB’s credit assessment framework (ECAF). Previously, the ECB accepted credit assessments only from American agencies Fitch, Moody’s, and Standard and Poor’s, as well as the Canadian agency DBRS.

Meanwhile, in a separate report released this week, Standard and Poor’s (S&P) highlighted Cypriot banks’ need to balance cost reduction with digital investment to counter inflation and persistent high credit provisions. The agency noted that despite progress, NPEs in Cyprus’ banks are still notably high, and expected to persist amid challenging conditions. The report also said that there is an expectation of economic growth above the EU average despite risks from exposure to Russia and reduced investment programmes. However, S&P added that the government’s mortgage-to-rent scheme could address some household NPEs. “Although part of targeted NPEs are already outside the banking sector, this could cushion some deterioration,” it concluded.

Source: Cyprus Mail