Frankfurt am Main, July 23, 2021 -- Moody's Investors Service ("Moody's") has today upgraded the Government
of Cyprus's long-term issuer and senior unsecured ratings
to Ba1 from Ba2. Concurrently, Moody's has also upgraded
the country's senior unsecured medium-term note (MTN) programme
ratings to (P)Ba1 from (P)Ba2 and has affirmed the commercial paper rating
at Not Prime (NP) and the other short term rating at (P)NP.
The outlook has been changed to stable from positive.
The key drivers for today's rating action to upgrade Cyprus's ratings
to Ba1 are the following:
(1) Reduction in Cyprus's exposure to event risks because of a decrease
in banking sector risks;
(2) Resilience of the economy to the pandemic shock and robust medium-term
GDP growth prospects being supported by sizeable European funds
The stable outlook reflects Moody's view that credit strengths and
challenges are balanced at the Ba1 rating level. National support
measures and sizeable EU funding limit the impact of the pandemic on the
supply side of the economy and contingent liabilities from the crisis
will probably remain contained. In addition, Moody's
expects debt affordability metrics to be favourable mitigating the impact
of the higher debt burden compared to the pre-pandemic level on
Moody's assessment of fiscal strength.
Concurrently, Moody's also raised Cyprus's local- and
foreign-currency country ceilings to A1 from A2 keeping the 6 notch
gap to the sovereign rating and reflecting de minimis exit risk from the
RATIONALE FOR THE UPGRADE OF THE RATINGS TO Ba1
FIRST DRIVER: CYPRUS'S REDUCED EXPOSURE TO BANKING SECTOR
The primary driver for the upgrade of the ratings of Cyprus to Ba1 is
the material improvement in the underlying credit strength of the domestic
banking system, which also reduces the risks of a systemic banking
crisis and therefore lowers the risk of a crystallization of contingent
liabilities in the banking system on the government's balance sheet.
The stand-alone credit profile of the domestic banking system,
which is one of the two main considerations underpinning Moody's
assessment of banking sector risks for the sovereign, improved to
b3 from caa1 because of the recent upgrade of the baseline credit assessments
of the two largest banks in Cyprus (Bank of Cyprus Public Company Limited
(long-term bank deposits rating: B1 positive, Baseline
Credit Assessment: b3) and Hellenic Bank Public Company Ltd (long-term
bank deposits rating: B1 positive, Baseline Credit Assessment:
b3)). The banks' risk profiles improved in recent years because
of the improving loan quality and the strengthening of the banks'
capital buffers. In addition, liquidity ratios improved with
the banks being less dependent on confidence-sensitive foreign
Asset quality has further improved under challenging market conditions
in 2020, partly because banks have sold some legacy problem loans
and partly because a comprehensive policy response to the pandemic has
so far shielded borrowers from defaults. The nonperforming exposures
(NPEs) of the bank's local operations in relation to total domestic
loans and advances improved to 17.7% at end-2020
from 27.9% end-2019 and 47.8% in December
2014. At the beginning of 2021, repayments started for a
number of borrowers that used the broad loan repayment moratorium in 2020
covering at its peak almost half of performing loans being the highest
level of payment deferrals in Europe, with indications that a large
part of loans under moratorium have resumed payments and inflow of new
NPEs will only increase moderately. The NPE ratio slightly increased
to 18.1% in April 2021. Continued uncertainty surrounding
the economic recovery, especially in most affected sectors such
as tourism, could still result in a further uptick in new NPEs.
Moody's expectation, however, remains that new inflow
of NPEs will be more than offset by banks' sustained efforts to reduce
legacy problem loans.
The size of the domestic banking system, which is the other main
factor determining banking sector risk, increased to 221.5%
of GDP at end-2020 from 203.6% at end-2019.
However, this was mainly driven by the economic contraction in 2020
and the size of the banking system measuring the risks of potential negative
spill over to the economy remains significantly below the levels of 271.9%
of GDP at end-2017 and the peak of 572.6% of GDP
SECOND DRIVER: RESILIENCE OF THE ECONOMY TO THE PANDEMIC SHOCK AND
ROBUST MEDIUM-TERM GDP GROWTH PROSPECTS BEING SUPPORTED BY SIZEABLE
The second driver for the upgrade of Cyprus ratings is the relative resilience
of the economy to the pandemic shock in combination with the robust medium-term
GDP growth prospects. Despite its sizeable exposure to tourism,
the economy of Cyprus proved to be more resilient to the pandemic shock
compared to the Ba1- and Ba2-rated medians as highlighted
by a less severe contraction of economic activity for Cyprus in 2020 (-5.1%
compared to the Ba1- and Ba2-rated medians of 7.1%
and 5.6%, respectively) in combination with Moody's
forecast of a very similar average rebound of around 4% in economic
growth in 2021-22. This was because Cyprus's non-tourism
related services such as business services, public administration
and shipping softened the significant pandemic shock on the tourism sector.
In addition, the support measures by the authorities are effective
in mitigating the impact of the pandemic shock on the supply side of the
economy and therefore materially reduce the risk of lasting impairment
on the economic strength of Cyprus. Very effective in reducing
the impact of the pandemic related shock on the labour market was the
sizeable take-up of the introduced job retention scheme in the
form of wage subsidies for affected companies that are required to keep
their employees for at least the double duration of the period the scheme
was used. Moody's estimates that this job retention scheme
saved around 26,000 jobs or 6% of employment in 2020.
Moody's expects GDP growth to be supported by sizeable European
Union (EU, Aaa stable) funding, the gradual recovery of the
tourism sector and solid growth in the non-tourism related services
over Moody's current forecast horizon out to 2025. Available
EU funding will increase substantially in 2021-26 compared to the
2014-20 period mainly because of the grants and loans from the
Recovery and Resilience Facility (RRF) in the amount of a total 4.2%
and 1.0% of GDP, respectively, and cheap funding
via loans from Support to mitigate Unemployment Risks in an Emergency
(SURE) with a volume of 2.6% of GDP. Moody's
simulations show that fully used RRF grants would boost GDP growth by
an average of 0.6 percentage points per year in the years 2022-25.
The actual impact on GDP growth may even be higher because Moody's
simulation does not take into account spillover effects from other countries
benefitting from higher EU funding. Nor does it account for potential
economic gains from reform implementation tied to the RRF funds and potential
long-term effects of digital and green investment as well greater
spending on research and development.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's view that risks to Cyprus's
credit profile are balanced. This is based on Moody's expectation
that the government's support measures and sizeable EU funding limit
the impact of the pandemic on Moody's assessment of economic strength
and contingent liabilities from the crisis will probably remain contained.
Moody's expects that the impact of the higher debt burden caused
by the pandemic, which jumped by 25 percentage points to 119.1%
of GDP in 2020 and will likely not to fall below the pre-pandemic
level before 2025, on Moody's assessment of fiscal strength
will be mitigated by favourable debt affordability metrics over the next
1-2 years. The European Central Bank's (ECB) Pandemic
Emergency Purchase Programme, which will be terminated if the ECB's
governing council judges that the pandemic crisis phase is over but not
before the end of March 2022, provides comfort that Cyprus will
continue to benefit from supportive funding conditions. Cyprus
has also benefited from cheap loans from the Support to Mitigate Unemployment
Risks in an Emergency (SURE) and intends to take a portion of the loans
available under the RRF. In addition, Cyprus has the option
to request a cheap loan with a volume of up to 2% of GDP via the
European Stability Mechanism (ESM)'s (Aa1 stable) COVID-19 credit
line until the end of 2022.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Cyprus's ESG Credit Impact Score is neutral to low (CIS-2),
reflecting moderately negative exposure to environmental risks and neutral
to low exposure to social risks and governance risks.
Cyprus's overall E issuer profile score is moderately negative (E-3),
reflecting chronic water shortages (though they are being addressed with
desalinization plants) and an exposure to rising global temperatures.
While the country's geographic location positions it well to benefit
from renewable energy, it remains below the EU average in terms
of the share of renewable energy in gross final energy consumption.
It is currently reliant on imported liquid fuels such as diesel and fuel
oil, though it is developing a natural gas sector following gas
finds in the Aphrodite field.
Moody's assesses its S issuer profile score as neutral to low (S-2),
reflecting low exposure to social risks over most categories. The
only categories that entail moderately negative risk are demographics,
labour, and income, in line with many other European countries.
For example, Cyprus has a relatively high youth unemployment rate.
Analysis from the European Commission indicates that pension expenditures
in particular will increase materially over the coming decades.
Cyprus's institutions and governance strength is reflected in a
neutral to low profile score (G-2).
GDP per capita (PPP basis, US$): 40,107 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -5.1% (2020
Actual) (also known as GDP Growth)
Inflation Rate (HICP, % change Dec/Dec): -0.8%
Gen. Gov. Financial Balance/GDP: -5.7%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -11.9% (2020 Actual)
(also known as External Balance)
External debt/GDP: 908% of GDP
Economic resiliency: baa2
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 21 July 2021, a rating committee was called to discuss the rating
of Cyprus, Government of. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer has become less susceptible
to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Cyprus's Ba1 government bond ratings would come under upward pressure
if progress on structural reforms would result in material improvements
of the sovereign's growth potential or would improve Cyprus's
institutions and governance strength, for example via tangible improvements
from reforms in the areas of the judiciary or control of corruption.
In addition, a very high absorption of EU funding in combination
with reform implementation tied to the RRF funds would support stronger
growth potential being rating positive. A sustained, more
rapid reduction of the debt burden to pre-pandemic levels than
currently expected by Moody's would also put upward pressure on
the rating. Moreover, a further material reduction in the
sovereign's exposure to banking sector risks would also be rating
WHAT COULD CHANGE THE RATINGS DOWN
Downward pressure on the Ba1 ratings would emerge if the economic recovery
would be materially weaker than expected by Moody's which would
likely go along with a lasting, significant impairment on the economic
strength of Cyprus and with a sizeable increase of NPEs and banking sector
risks. A sustained, material deterioration of the government's
fiscal position would also put downward pressure on the ratings.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
MD-Sovereign / Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454