The first long-awaited upgrade of the Cyprus economy by the rating agencies for this Fall has finally arrived with the recent upgrade from S&P by one notch (from BB- to BB). Now we are only two notches away from the investment-grade (IG) market, which is a far cry from the ratings that we had back in 2013 during the banking crisis (CCC+), five notches below the latest rating.
We are still part of the ‘junk’ (high-yield) sector, but if things go well or as planned, then during 2017 we might return back to the ‘elite club’ of the countries that belong to the IG market. I am also expecting that the other two important rating agencies (Moody’s and Fitch) will also be upgrading the country soon – the rating by Moody’s is B1 (4 notches away from the IG market), while for Fitch is B+ (again, four notches away from the IG market).
Why the latest upgrade?
Looking at the recent history of ratings, Cyprus first joined the high risk/high return ‘junk’ market on Jan. 13, 2012 with the downgrade by S&P. Within the next few months, the rest of the main rating agencies have also downgraded us into the ‘junk’ sector.
Further downgrades have taken place until 2013 until we stabilized the economic situation and we started having gradual upgrades. So, why did we have the latest upgrade? Well, according to S&P the reason for the upgrade is the improvement in the general economic condition of the country.
The real rate of growth will be higher than what was originally expected (2.7% expected for this year, and projected at around 2.5% for the period 2017-2019), while the budget account will be balanced or even with a surplus in the coming years, which can lead to declining levels of public debt. Furthermore, the unemployment rate is expected to fall below 12% by 2018, increasing households’ disposable income and private consumption. In terms of the banking sector, the situation has stabilized and although the level of non-performing loans (NPLs) is still very high, is gradually declining through the restructuring process.
