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Rating agency Moody’s changed the outlook for the Cypriot economy to positive from stable, citing the reduction of the sovereign exposure to event risks stemming from the banking sector and the improving fiscal strength beating previous expectations.

 “The primary driver of the positive outlook is that Cyprus`s bank-related exposure to event risk continues to decline,” Moody’s said, noting that policy action by the government and actions by the banks will likely lead to a further large reduction in non-performing exposures (NPEs) over the coming 18 months.

Recalling that NPEs in the Cypriot banking sector declined to 30.6% of gross loans in March 2019 from their peak of 49.8% in May 2016, Moody`s said it “expects that number to continue to fall, and quite possibly to halve, over the next 12-18 months.”

The agency cites two factors. Namely the government scheme ESTIA, launched on 2 September, aiming to subsidize repayment of NPEs collateralized by primary residences by one third with Moody’s noting that these loans “are the most difficult area of NPEs.” According to Moody’s ESTIA will assist repayment of NPEs amounting to € 1.1 billion held by Bank of Cyprus and Hellenic Bank rated by the agency.

“These NPLs amounted to 11% of total NPEs in the banking sector as of March 2019,” the agency added.

Furthermore, Moody’s noted that “Cyprus`s debt metrics are improving at a faster pace than we had previously anticipated and from a lower level,” noting that the impact of the resolution of Cyprus Cooperative Bank had a less pronounced impact on the country`s debt burden last year, increasing the debt burden to only 102.5% compared to Moody`s previous expectations of 107% of GDP.

The government was forced to issue 3.2 in bonds in the second half of 2018 to facilitate the sale of nationalized Cooperative Cyprus Bank to Hellenic Bank, which lead to a spike in the country’s nationa debt above 100%.

“Since then, the government has returned to running large primary and fiscal surpluses , and we expect this trend to continue,” the agency added, adding that they “now forecast that debt will fall to 97% of GDP this year and, due to sizeable primary surpluses and ongoing low funding costs, it will continue to fall by around 5 percentage points per annum, to around 75% by the end of 2023.”

Noting the improved resilience of the government`s balance sheet. Moody’s added that “while Cyprus faces rising spending pressures coming from health care, public sector wages, and Estia, we believe that the debt burden will continue to decline. On the affirmation of Cyprus’ rating to Ba2, Moody’s said cited Cyprus’ “small but wealthy economy, and improvements in its economic resilience in recent years,” and the government`s track record of fiscal outperformance in the wake of the country`s banking crisis.”

Moody’s noted it could consider upgrading Cyprus`s sovereign rating if NPEs were indeed to continue to fall to levels substantially below 20%, reflecting a material improvement in the strength of the banking system and reducing contingent liability risk and if there is “greater clarity” that the debt burden will continue to fall steadily to below 90% over the coming 1-2 years which concludes a downgrade is unlikely to happen to Cyprus's rating. 

*Article is from Moody’s changes Cyprus’ outlook to positive on better fiscal performance & reduction of bank-related risks. Retrieved from www.in-cyprus.com*

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