Roundup: Fitch upgrades bailed-out Cyprus ratings to near investment grade

Fitch Ratings has upgraded Cyprus's long-term foreign and local currency Issue Default Ratings by one notch to BB- from B+, a report made available in Nicosia on Saturday said.

The report said the outlook of the Cypriot economy is positive, meaning that its next ratings in a few months could also upgrade the island's ratings.

The upgrading puts Cyprus two notches below investment grade, which enables borrowing from international markets at low interest rates.

Fitch said the upgrade of Cyprus's IDRs reflects the fact that it continues to make strong progress in its economic adjustment program following the 2013 crisis and its 10-billion-euro (about 10.9 billion U.S. dollars) bailout by the Eurogroup and the International Monetary Fund.

"Its exit from the EU and IMF program in March took place in a context of out-performance of fiscal and economic program targets, success at lifting capital controls, and steps taken to restructure the banking sector," the report said.

It added that the economic recovery, now into its second year, is supporting employment, bank asset quality adjustment, and public finances.

Fitch is projecting GDP growth of 2.9 percent in 2016, up from 1.9 percent projected a year earlier, pushed by strong private consumption and investment, and reflected broad based growth across industries, most notably in tourism.

Unemployment fell to 12.1 percent in 2016, from 14.9 percent in 2015.

Fitch says it expects a GDP growth for 2017-2018 of around 2.5 percent due to an expected increase in foreign direct investment.

Finance Minister Harris Georgiades, in presenting the 2017 budget to the economics parliamentary committee, said that growth next year is expected to top 3 percent, which is in line with a projection of the Economics Research Centre of the University of Cyprus.

Fitch warned, however, that there are also risks to the outlook of the Cypriot economy emanating from banking sector deleveraging and the weak external environment.

But it said that the banking sector as a whole is gradually strengthening, a fact becoming evident by the pick-up in deposits and stable capitalisation and the reduction of non-performing loans.

Fitch projects Cyprus' government debt to decline to just over 100 percent of GDP by 2018 from a peak of 108.9 percent in 2015, with the financing position and outlook remaining favorable.

But Fitch warned against a lax in reform measures because of the improved economy and the exit from bailout program.

Fitch also judged the impact of Brexit on Cyprus, mostly through tourism representing 39 percent of arrivals, to be moderated by diversification of markets and evidence that advance bookings from Britain suggest no slowdown for 2017.

Fitch says that provided there is not any slackening in economic planning it does not currently anticipate developments with a high likelihood of leading to a downgrade. Endit