Cyprus almost as safe as Portugal

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By:
Jeremy Weltman
Published on:

The island state has returned to growth earlier than expected in spite of its trade and banking-sector exposures to Greece, after the banking crisis caused a severe macro-economic adjustment.

A real GDP rise of 0.5% during the second quarter of this year saw year-on-year growth reach 0.8%, ending the three-year recession.

Although the GDP outlook is only one of many risk factors, experts claim the growth figures confirm the worst is over for the crisis-hit sovereign, not least because of the political commitment to reform.

The Cyprus risk score has steadily improved this year in Euromoney’s crowdsourcing survey, rebounding in Q2, and is seemingly on course for further improvement in Q3 as economists and other risk experts make their latest quarterly assessments.

Chalking up almost 53.1 points from a maximum 100 allotted, Cyprus has managed to climb one place in the rankings to 56th out of 186 countries surveyed, leapfrogging India and closing in on Portugal into a more comfortable tier-three position:

Euromoney divides all 186 sovereigns into five distinct categories. Tier three is synonymous with a BB+ to A- rating, signalling the sovereign’s single-B credit ratings from Fitch, Moody’s and S&P are now out of line.

Cautiously optimistic

It hasn’t been easy, of course, with unemployment remaining high, deflation still severe, and the country saddled with a legacy of debts, relying on a multilateral creditor lifeline.

Constantin Gurdgiev, adjunct professor at Trinity College Dublin, is quite cautious, stating: “Any significant improvements in the country scores relate to the policy-level post-crisis normalization, rather than to a measurable improvement in macroeconomic fundamentals.”

Yet a troika review in July signalled enough progress had been made for Cyprus to complete the next stage of its bailout programme, which is due to terminate before next year’s elections, signalling the government will be returned.

The report noted the slow pace of debt restructuring is now picking up.

“Fiscal targets in the first half of 2015 were met with substantial margins,” it claims, adding: “The authorities are making progress on their structural reform agenda.”

The European Commission’s forecasts, published in May, showed the gross debt burden falling slightly from last year’s peak of around 107% of GDP, with the deficit slashed from 8.8% of GDP to 1.1%. Data for the first seven months of 2015 show it narrowing to 0.7% of GDP, despite the enormous difficulties involved.

This is down to the economy performing better than expected. The Commission was then predicting a real-terms decline of 0.5%, but GDP was growing during the first half of the year.

Business confidence took a dip in July, but improved again in August as the outlook for services brightened, and a raft of new legislation will make it easier to resolve the burden of mortgage debt.

Survey scores for bank stability, the economic outlook and the government’s finances have picked up this year, and Dimitria Rotsika, an economic analyst at Piraeus Bank Group, is guardedly optimistic concerning the economic recovery after years of recession.

“Two risk factors to consider are a possible pass-through effect from the ongoing uncertainty in Greece and the increasing ratio of non-performing loans [in the banking system],” she states with caution, but goes on to say: “The latter is expected to improve aided by the recent voting in favour of the foreclosures bill.”

This notable legislative achievement might just have finally put an end to the country’s woes. 

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.