It also noted in an press release late on Friday that the island’s institutional strength and record of robust economic growth and sound fiscal policy prior to the Covid-19 pandemic are balanced by balance-sheet weaknesses, in particular high public debt, and a weak banking sector.

The agency forecasts a real GDP growth of 4.8% this year, partly due to strong base effects. And a gradual normalisation of growth rates in 2022 and 2023 of 3.7% and 2.9%, respectively, following a downturn of 5.1% in 2020.

Fitch also noted that economic rebound in Cyprus was stronger than in the eurozone during the second and third wave of the pandemic in late 2020 and early 2021.

“Tourism and domestic demand will both support the recovery, although there is still uncertainty regarding the fourth wave of the pandemic and its impact on economic sentiment and air travel within the EU,” the agency said.

It then pointed out that growth will be also supported by the Next Generation investments over the medium term, consisting of €1 billion in grants and EUR200 million in loans, total investments of 5.5% of GDP until 2026 and it envisages mobilizing an additional €1 billion private investments.

Concerning the public finances, Fitch forecasts budget deficit of 5.2% of GDP in 2021 after a 5.7% of GDP deficit in 2020.

“We expect a gradually shrinking deficit from next year, reaching 2.4% of GDP in 2023. The narrowing of the deficit is expected to be driven by an end to the pandemic support measures, and no substantial structural fiscal consolidation is expected until 2023, based on EU guidance,” the agency added.

With regard to Cyprus’ public debt, the agency said that Gross general government debt (GGGD) surged to 119% of GDP in 2020, exceeding the 109% peak in 2014 and well above the `BBB` current median of 57%.

The 24pp increase, almost twice the 14pp increase in eurozone, was only partly driven by the pandemic, as cash buffers were increased significantly to over 15% of GDP as the sovereign took advantage of benign financing conditions, the agency said.

And it noted that the debt ratio is forecasted to decline by 10pp of GDP in 2021, “predominantly as the extra cash reserves are used for debt redemptions.”

Fitch also added that debt reduction will be driven by fiscal adjustment and economic growth from 2022 and GGGD is forecast to fall towards 100% in 2025, close to its 2018 level of 99%.

“While debt is still elevated, Cyprus continues to enjoy very favourable financing conditions,” Fitch added.

Furthermore, Fitch pointed out that the banking sector remains “a weakness relative to `BBB` peers,” noting that the “highly concentrated banking sector remains among the weakest of rated sovereigns, at `b` and the Outlooks on the IDRs of the two major banks are Negative”.

The agency noted that the fall in non-performing exposures (NPE) slowed in the first half of 2021, declining by €143 million in 1H21 to €4.6 billion, equal to 16.5% of total loans after falling by over €3.7 billion (from €E8 billion at end-2019), due mainly to asset sales and write-offs by the two largest banks.

Noting that borrower’ repayment behaviour following the expiry of a loan payment holiday in the end of 2020 is encouraging, Fitch points out that “downside risks remain.”

“Improvement of the banks` asset quality depends on execution of large NPE transactions,” Fitch said.

Source: In-Cyprus