Moody`s Investors Service has upgraded Cyprus`s government bond rating to B3 from Caa3. The rating agency has also changed the outlook on the government bond rating to stable from positive and affirmed Cyprus`s Not-Prime (NP) short-term rating.<\/p>\n
According to Moody’s the upgrade reflects the government`s progress to date in addressing the country`s key challenges with respect to macroeconomic stability, fiscal consolidation and banking sector stability. As it is noted, the key drivers for the upgrade were the consolidation of the government`s fiscal position, as illustrated by an expected return to a primary budget surplus from 2014, and the expectation that public debt relative to GDP will level off in 2015, as well as the stabilisation of Cyprus`s financial sector through the recapitalisation of troubled banks, which, to some extent, lowers the risk that bank-related contingent liabilities will crystallise on the government`s balance sheet.<\/p>\n
However, Cyprus`s government bond rating remains constrained by substantial credit challenges, including a weak economic outlook and the very high and still rising non-performing loans (NPLs) in the banking sector, which generate further negative risks to the government`s balance sheet.<\/p>\n
The rating agency notes that Cyprus`s fiscal metrics have exceeded the targets set with the Troika (EU, IMF and ECB): In 2013, the primary deficit fell to 2.0% of GDP versus its target of 4.2% in the original programme. Most of the measures aimed at permanently reducing the deficit were included in the 2013 budget, and resulted in significant fiscal consolidation of 7.5% percentage points of GDP over 2013-14.<\/p>\n
It also points out that banks` balance sheets have been bolstered through increased capital buffers, external deleveraging (through sales of non-core activities overseas) and improvements in their funding profiles, says Moody`s. As a consequence, the sovereign`s susceptibility to shocks emanating from the banking sector has decreased to some extent.<\/p>\n
According to Moody`s, the stable outlook reflects a balance of risks. On the one hand, Moody`s expects that the government`s commitment to continuing its fiscal consolidation efforts will remain high, and that progress achieved in consolidating public finances and restoring the banking sector will most likely not reverse. On the other hand, the weak economic outlook and the high NPLs in the banking sector continue to pose risks to debt sustainability.<\/p>\n