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Fitch revises Cyprus' outlook to stable from positive on potential virus impact

Fitch Ratings revised its outlook on Cyprus to stable from positive, citing expectations of a material deterioration in economic growth and fiscal position due to the coronavirus pandemic.

The rating agency expects GDP to contract more than 2% in 2020, with the baseline forecast tilted firmly to the downside amid views that outbreak containment in the second half could lead to "a relatively strong economic recovery" in 2021.

Anticipated fiscal spending, including healthcare expenditures and job subsidies, could result in a budget deficit near 1% of GDP in 2020, versus a budget surplus of about 2.8% of GDP the prior year, Fitch said. The country's ratio of gross general government debt to GDP, which was on a downward trajectory after spiking to 109% in 2014, is forecast to rise in 2020.

Cyprus' current account deficit is projected to rise to 8% of GDP in 2020 from 6.7% in 2019 despite lower energy prices and falling imports, due to an estimated fall in service export receipts on account of a deteriorating tourism sector, Fitch said.

The rating agency expects Cyprus' GDP growth forecast to be "highly uncertain in 2021" but to gradually converge to 2% medium-term growth potential afterward. The gross general government debt-to-GDP ratio is projected to fall below 65% of GDP by 2028.

Fitch affirmed Cyprus' issuer default rating at BBB-.