October 20, 2017 / 8:06 PM / 2 months ago

Fitch Upgrades Cyprus to 'BB'; Outlook Positive

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Cyprus - Rating Action Report here LONDON, October 20 (Fitch) Fitch Ratings has upgraded Cyprus's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB' from 'BB-'. The Outlook is Positive. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The upgrade of Cyprus's IDRs reflects the following key rating drivers and their relative weights: High Cyprus is experiencing a strong improvement in the performance of and outlook for its public finances. The budget is on track to record a surplus of 1% of GDP in 2017, after 0.4% in 2016, compared with the 'BB' median of a 3.2% deficit. Gross general government debt (GGGD) is forecast to fall just below 100% of GDP in 2017 from 108% at end-2016, owing to strong nominal GDP growth, the budget surplus and a one-off effect from early debt repayment. Medium-term debt dynamics point to a firmly declining trend. Our baseline medium-term assumptions of 2% GDP growth and gradually increasing effective interest rates would lead GGGD to decline to around 80% in 2022, an average 4pp decline annually. Medium The economic recovery has broadened and GDP growth has consistently outperformed forecasts over recent years. Fitch now forecasts an average 3.5% GDP growth in 2017 and 2018, in light of the broad-based recovery in 1H17 (3.6%) and improving confidence indicators, compared with around 2.5% a year ago when Cyprus was upgraded to 'BB-'. The recovery is also reflected in the labour market, where unemployment rate has declined to 10.6% in 2Q17 from a post-crisis peak of 16% in 2014. Nevertheless, medium-term growth potential remains highly uncertain after the global financial crises. Although the strong growth momentum creates a favourable backdrop for the necessary deleveraging of the private sector, faster resolution of mortgage arrears could slow the recovery through weaker household consumption in the short run. The sovereign is gradually rebuilding its track record of market access: it issued a seven-year bond in June 2017 at a 2.8% yield. Current cash reserves exceed the sovereign's total 2018 financing needs. Cyprus's 'BB' IDRs also reflect the following key rating drivers: Notwithstanding the cyclical recovery, the banking sector's exceptionally weak asset quality remains a key weakness for Cyprus's credit profile and material downside risk to the recovery. The ratio of non-performing exposures (NPEs) to total loans was 44.1% in June 2017, among the highest of Fitch-rated sovereigns, compared with 46.4% in December 2016. The total value of NPEs was EUR22.8 billion, more than 125% of GDP, but down from a peak of EUR28.4 billion in December 2014. Losses on unreserved NPEs could be significant if further haircuts were needed to liquidate underlying collateral, highlighting the potential need for further capitalisation. In such a scenario, it is unclear if that would come from the private or public sector. Deleveraging is progressing slowly, despite the improved repayment capacity of the private sector and banks' focus on NPE resolution. The persistently high level of NPEs constraints new lending capacity and poses a significant downside risk to the recovery. The three largest banks (Bank of Cyprus, Hellenic Bank and Cyprus Coop Bank) have had ambitious and detailed strategies since 2015, including debt-to-equity swaps, restructuring and establishment of servicing platforms but the resolution of NPEs remains slow and moral hazard risks high. Deposits in the banking sector were EUR49.1 billion in August 2017, little changed since December 2016, but liquidity conditions have improved, reflected for example in the full repayment of ECB emergency liquidity assistance balance earlier this year. However, the sector's liquidity remains sensitive to changes in market sentiment. Cyprus's ratings are supported by high GDP per capita, a skilled labour force, and strong governance indicators relative to 'BB' peers. The country's current account deficit widened to 4.9% of GDP in 2016 from 1.5% a year earlier. The data is distorted by special purpose entities (SPEs, mainly the non-resident shipping industry). The current account deficit would have been significantly lower excluding SPEs, according to central bank estimates. For 2017 and 2018 Fitch forecasts deficit (including SPEs) to remain close to 5%, due to a pick-up in domestic demand, including investment with high import elasticity. Net external debt (NXD) was 150% of GDP at end-2016, compared with the 'BB' median of 19%. Cyprus's international investment position (IIP) was -128% of GDP, the second-highest indebtedness among eurozone members, almost 4x the EU's Macro Imbalance Procedure threshold of -35%. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns a score equivalent to a rating of 'BBB+' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - External finances: -2 notches, to reflect the very high net external debt relative to peers (not captured in the model) and not fully benefiting from the euro's reserve currency status (assigned by the model) - Structural features: -2 notches, to reflect the banking sector weakness that could pose a large contingent liability to the sovereign and lead to macro-stability risks. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to an upgrade include: -Reduction of private sector indebtedness and banking sector NPEs that materially reduce the sovereign's contingent liabilities; -Track record of declining GGGD/GDP ratio; and -Narrowing current account deficit and reduction in external indebtedness. The Outlook is Positive. Consequently Fitch does not currently anticipate developments with a high likelihood of leading to a downgrade. However, future developments that may individually or collectively lead to negative rating action include: -Failure to improve asset quality in the banking sector; and -Deterioration of budget balances or materialisation of contingent liabilities that results in the stalling of the decline in the government debt-to-GDP ratio. KEY ASSUMPTIONS Fitch does not expect substantial progress with reunification talks between the Greek and Turkish Cypriots over the next quarters. The reunification would bring economic benefits to both sides in the long term but would entail short-term costs and uncertainties. Gross government debt-reducing operations such as future privatisations are not considered in Fitch's baseline scenario. The projections also do not include the impact of potential future gas reserves off the Southern shores of Cyprus, the benefits from which are several years into the future. The full list of rating actions is as follows: --Long-Term Foreign- and Local-Currency IDRs upgraded to 'BB' from 'BB-'; Outlook Positive; --Short-Term Foreign- and Local-Currency IDRs affirmed at 'B'; --Country Ceiling upgraded to 'BBB' from 'BBB-'; --Issue ratings on long-term senior unsecured - local-currency bonds upgraded to 'BB' from 'BB-'; --Issue ratings on short-term senior unsecured local-currency bonds affirmed at 'B'. Contact: Primary Analyst Gergely Kiss Director +44 20 3530 1425 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Michele Napolitano Senior Director +44 20 3530 1882 Committee Chairperson Ed Parker Managing director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below