Fitch Ratings affirmed Cyprus' long-term issuer default ratings at BBB- and revised the outlook to positive from stable, citing the island's strong fiscal position and solid economic growth.
Cyprus currently runs the largest budget surplus among eurozone member states, with a general government surplus expected at more than 3% of GDP and a primary surplus of around 6% of GDP in 2019. The rating agency expects Cyprus to maintain a budget surplus of around 2% of GDP through 2021.
In the last five years, the Cypriot economy has expanded at an annual rate close to the 3.6% median for similarly rated countries. Despite an expected growth slowdown, the economy will perform better compared with eurozone counterparts, said the rating agency, which forecasts 2.9% growth for Cyprus in 2019 and 2.7% in the next two years.
Fitch also projects Cyprus to pay its government debt ratio down to just 60% of GDP by 2028 from an expected 95% at the end of this year, assuming an annual GDP growth rate of 2% and minimal increases in marginal effective interest rates.
The rating agency, however, noted the weakness of Cyprus' banking sector, weighed down by less-than-ideal asset quality and high nonperforming exposure ratios. The government launched its Estia loan program in September to help defaulting mortgage borrowers through loan restructurings and subsidies to encourage loan repayments.
Fitch said a decline in nonperforming exposure ratios, a marked reduction in government debt, and a narrowing of the current account deficit will lead to a ratings upgrade. On the other hand, a stalling in the decline of of its government debt-to-GDP and any further deterioration of the banking sector which negatively impacts the real economy or the government's fiscal position, will merit a downgrade.
Cyprus' short-term issuer default ratings were affirmed at F3.
