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.
However, Moody’s affirmed Cyprus’ long-term rating to Ba2, two notches below investment-grade, and remains the only rating agency to maintain Cyprus’ rating at junk.
“The primary driver 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 subsidise repayment of NPEs collateralised by primary residences by one third, with Moody’s noting that these loans “are the most difficult area of NPEs.” It said Estia will assist repayment of NPEs amounting to €1.1bn held by Bank of Cyprus and Hellenic Bank rated by the agency.
The agency also notes it expects that “the banks will complete further major asset sales over the period,” noting that the amendments approved by the parliament on foreclosures, which have been referred to the Supreme Court, “would hinder the process somewhat.”