As mentioned in the report, the assessment of Cyprus is a result of the balancing of one of its institutional strengths reflected in per capita GDP and governance ratings rated "A" instead of "BBB" and the history of strong economic recovery and sound fiscal policy before COVID-19 shock, and on the other hand with the weaknesses of the balance sheet, in particular the further increase of the high public debt and the reduced Non-Performing Loans (NPLs) which, however, continue to increase in the banking sector.


It is noted that the COVID-19 pandemic led to a deep recession of the Cypriot economy in 2020, similar to other countries. GDP shrank by 11.6% (on a quarterly basis) in the second quarter of 2020 after falling by 2.1% in the first quarter of 2020. Tourism was hit particularly hard, with tourist arrivals falling by more than 80% in January-August compared to the same period in 2019. It is noted that domestic demand proved to be more resilient due to the relatively low infection rates and the more limited measures taken.

Fitch forecasts a 6% contraction in GDP in 2020, followed by a 4% recovery in 2021 and a 2.7% GDP growth in 2022 based on positive growth rates from the third quarter of 2020 onwards. The forecast indicates that the level of GDP will be 2% lower in 2021 than pre-crisis levels.

It is also reported that Cyprus had a strong growth history before the pandemic with an average growth of five years until 2019 4.4%, above the average of the "BBB" category which was 3.6%. Fitch maintains its forecast for medium-term growth of 2% unchanged from the pandemic.

The report also notes that the pandemic ended the gradual improvement in the labor market, which began in 2014 with a high unemployment rate of over 16%. He states, however, that the deterioration from 6.3% in the 4th quarter of 2019 to 6.8% in the 2nd quarter of 2020 was relatively mild. He adds that the sluggish impact of the deep recession on the labor market is due in part to government support measures and the flexibility of key industries, such as tourism, which are reflected, for example, in the high share of seasonal foreign workers in the sector.

The house adds that fiscal easing in response to the pandemic and declining revenues due to the recession will lead to an estimated budget deficit of about 5% of GDP in 2020, compared to pre-pandemic budget surpluses, which peaked at 3% GDP in 2019.

The budget deficit for January-July 2020 was 931 million euros, compared to a surplus of 386 million euros in the same period in 2019. This means a deterioration of 1.3 billion euros in the budget balance, about 6% of annual GDP. It is noted that the government estimates that the total cost of all fiscal measures will be equal to 4.5% of GDP.

Fitch predicts that the budget deficit will fall below 2% of GDP in 2021, due to the economic recovery and the expiration of temporary support measures. Although European fiscal rules will not be enforced in 2021, the fiscal balance is expected to remain within the 3% threshold of the Stability and Growth Pact in the medium term.

Fitch also predicts that the ratio of gross public debt to GDP will increase to 113% in 2020, compared to 95% in 2019 and the previous high of 109% of GDP in 2014, well above the current level. average price of the "BBB" category which is 36%.

As reported, the declining trend of the government debt-to-GDP ratio between 2014 and 2019 reflects the combination of strong economic growth and significant fiscal adjustment and increased the ability to absorb pandemic shock.

Debt is projected to fall to around 100% of GDP in 2024. It is noted that the history of significant fiscal consolidation and prudent fiscal policy is an important assessment force in the current environment.

It is also reported that the large banking sector remains a weakness mainly due to the low quality of assets, especially the very high NIS ratios that continue to affect capital and profitability.

It is also noted that NPLs are likely to increase due to the COVID-19 shock. About half of all outstanding loans in Cyprus are in a moratorium until the end of December 2020. The measure will limit the growth of NPLs in the short term and will support the liquidity of borrowers in 2020, however it remains difficult for the house to estimate which part of these loans will become non-performing.

According to the house, the factors that could lead to an upgrade of the rating would be a possible reduction of NPLs in the banking sector, the return of public debt to a steady downward trend in the medium term, and the reduced vulnerability to external shocks, for example due to the reduction of current account deficit.

The main factors that could, individually or collectively, lead to a negative rating / downgrade would be a stronger and lasting macroeconomic impact from the COVID-19 pandemic which would also lead to a deterioration in fiscal measurements, the delay in reducing the Government Debt to GDP and the increased risks in the banking sector for example, from the significant deterioration of the quality of assets. 


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