How Cyprus could improve its credit rating, according to S&P
In its research, the credit agency S&P notes several themes weighing on the Cypriot economy – other credit agencies also point out that these problems are holding back Cyprus.
We asked Sébastien Boreux, Sovereign analyst at S&P Global Ratings, and one of the agency’s report authors on Cyprus, comment on these issues.
Private debt is still a threat to growth in Cyprus, S&P says; it is extremely high compared to other countries in Europe. This is the second highest, at 259% according to Eurostat figures, after Hungary at 318%.
“This is changing,” notes Boreux. “The mindset in recent years has been that Cypriot households would go into debt specifically, even if they had enough cash or assets. After all the crises, households were concerned to be safe when needed.
There really was no kind of a safety net. Thus, the establishment of the national health system GESY is a positive step towards reducing private debt in Cyprus. This makes Cypriots feel more secure. But private debt is still far too high and weighs on performance, ”said Boreux.
What about the dependence on foreign investment, which is certainly something you see in the business world here.
“Although foreign investment declined last year, there is good reason to expect it to return. There is a good pipeline of projects in Cyprus, in a number of different sectors, and the development of investment policies has been well received by the investment community. For example, anything related to oil and gas discoveries around Cyprus will undoubtedly attract quite a bit of investment. And then you have plenty of projects in tourism, health, education and energy.
Europe is certainly a source of FDI, Russia, the Middle East, Asia too.
Last year was a big shock. The reduction in tourism receipts has led to a sharp widening of the current account deficit. But in the future, the current account deficit will gradually narrow.
We expect net exports to improve, which will have a positive impact on growth and reduce the current account deficit. We expect a rebound in information and communication technologies, an important sector in Cyprus. Business services are also expected to recover over the coming year. And then, more gradually, tourism will rebound – it will take longer than other sectors, of course. The full recovery of tourism is only expected between 2023 and 2024. This is true for all tourism economies.
Considerable progress has been made in the assignment of NPLs and the stock of these loans has declined considerably.
But, at 18 percent of the total loan stock, non-performing loans are still a significant problem. This is one of the highest percentages in Europe. So that’s one of the reasons we still see this as a risk, even though it’s mostly legacy issues.
And then we expect that risk to increase, with more non-performing loans, due to the use of moratoriums on around 50 percent of loans in Cyprus, which is more than anywhere else. Cyprus also has a large number of restructured loans and the default rate is high.
We expect non-performing loans to increase in 2021 and then gradually decrease.