The agency also affirmed its long-term foreign and local currency Issuer Default Ratings (IDRs) at `B-`, as well as the issue ratings on Cyprus’s senior unsecured foreign and local currency bonds at `B-`.
The Country Ceiling and the Short-term foreign currency IDR have been affirmed at `B`.
“Developments in public finances continue to materially exceed Fitch’s previous expectations,” Fitch notes, adding that due in part to a shallower recession than previously forecast, the strong budget execution should help narrow the headline fiscal deficit to 3.3% of GDP in 2014, significantly below the 5% projected by Fitch in April.
Noting that Cyprus has implemented fiscal adjustment measures amounting to 6.8% of GDP in 2013 and 2014, Fitch points out “nevertheless, it will still be challenging to meet the over-arching objective of a primary budget surplus of 4% of GDP by 2018, though recent outturns provide someencouragement.”
However, Fitch expects the recession to last longer than assumed under the EU/IMF programme, with the economy projected to shrink by around 0.8% in 2015, compared with EU/IMF projections for a 0.4% growth in 2015, and return to growth in 2016, a year earlier than previously thought.
According to Fitch, the general government debt-to-GDP ratio (GGGD) is now expected to peak a year earlier in 2015 and decline more rapidly than under previous forecasts. The agency projects that public debt is expected to peak at 113% of GDP in 2015 (compared with over 126% in the previous review) and to gradually decline to 100% by 2020, owing to better growth projections and smaller fiscal deficit forecasts in the near term, and changes to national accounts data on accounting, as well as statistical and methodological changes.
But Fitch believes that there are still significant risks to creditworthiness posed by Cyprus’ continued deep economic and financial adjustment.
Concerning the banking sector, Fitch notes that there are some signs of stabilisation in bank deposits despite the lifting of all domestic payment restrictions. It notes however that the environment remains challenging, in particular with regard to poor asset quality, as non-performing loans (NPLs) on average reached over 50% of gross loans in August 2014 representing 157% of the country’s GDP.
“The quality of assets may deteriorate further in the next quarters, albeit potentially at a slower pace,” the agency points out, adding that the challenge for the banks is to limit any additional credit deterioration and to recover NPLs without affecting their recently restored capital positions.
The agency believes that “risks to programme implementation have eased on recent performance but remain elevated,” with a significant portion of the consolidation also remains outside the programme period, which ends in 1Q16, and medium-term fiscal targets, in particular, are ambitious.
Source: Famagusta Gazette
