In a news release following the rating action, the finance ministry said that the agency had noted “the positive fiscal performance of Cyprus in 2021 – 2022 but also the continued resilience of the economy to the various international crises that emerged in recent years.” “The continued improvement of the state’s fiscal position and the continued consolidation of the banking sector are two sectors crucial to achieving further upgrades,” the ministry added.

In its rating action, issued following the presidential elections and the new government of Nikos Christodoulides, which assumed office on March 1, the agency said “we do not expect a substantial change in the broad direction of economic policy under the new administration.” “The Cypriot economy has shown a degree of resilience to the external shocks brought about by the war in Ukraine,” Fitch said in its rating action, pointing out that real GDP expanded by 5.6 per cent in 2022, above its forecast over a 4.7 per cent growth issued last September.

The agency pointed out that tourism revenue reached above 90 per cent of 2019 levels, despite the absence of tourists from Russia for most of the year, which accounted for almost 20 per cent of arrivals in 2019, a record year. “But the loss of this market has been mostly offset by higher numbers from the UK, Israel, and EU countries. Moreover, strong growth in other sectors in the economy, such as information and communications technology services, points to greater diversification of economic activity,” the agency noted.

Fitch also cited fiscal outperformance as public finances improved significantly last year, with the general government balance turning from a deficit of 1.7 per cent of GDP in 2021 to a surplus of 2.3 per cent “much higher than Fitch’s forecast of a small deficit at the previous review in September 2022.” Furthermore, Fitch said for 2023 it expects a lower surplus, due to the slowdown in economic activity, which will lower revenue growth and continued energy-related support measures, forecasting a reduced fiscal surplus of 1.8 per cent this year, before improving marginally to 2.0 per cent of GDP in 2024. Fitch said economic activity will decelerate this year, “as high inflation erodes real incomes and rising interest rates dampen demand for loans, affecting consumption dynamics and private investment.”

However, the agency pointed out that the deployment of Next Generation EU funds should offset some of the weakness of private domestic demand. “Overall, we expect real GDP growth of 2.1 per cent this year and 2.7 per cent in 2024, as economic activity expands at a faster pace from the middle of this year,” Fitch added.

On Cyprus’ public debt, Fitch noted that strong nominal GDP growth and the much-improved fiscal position “translated to a sharp decline in the government debt to GDP ratio in 2022, to 86.5 per cent, from 101.1 per cent in 2021.” “Our projections are consistent with the government debt ratio falling further over the next two years, to 81.3 per cent in 2024,” the agency said, adding that baseline projections assume that the debt ratio will continue to decline over the medium term, to around 73 per cent in 2027.

Fitch said it assumes that the Cypriot authorities will preserve a sizeable liquid asset buffer, in line with their prudent debt management strategy, and regularly issue bonds to at least partly cover upcoming debt amortisations. With yields on government debt rising sharply, the agency noted that “the average cost of Cyprus’ public debt will rise much more slowly, given the average maturity of debt of just under 7.5 years.”

On the banking sector, Fitch said that the overall trend in asset quality improvement in the Cypriot banking sector has been resilient to external shocks to the economy. Just before the spread of the Covid-19 pandemic in January 2020, the non-performing loan (NPL) ratio was 28.0 per cent and declined last year to 10.5 per cent in October from 11.7 per cent in January. “And NPLs have fallen further, as Cyprus’ two systemic banks completed one and are close to completing a further large sale of NPLs,” the agency concluded.

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Source: Cyprus Mail