Roundup: Moody's keeps Cyprus' ratings into speculative range, changes outlook to positive

Moody's Investors Service has kept Cyprus's sovereign ratings to B1, which is within speculative range and four notches below investment grade, but changed the outlook to positive from stable, according to a report made available in Nicosia on Saturday.

The surprise move by Moody's came after two successive upgrades of bailed out Cyprus's ratings by the other two main rating agencies over the last two months on account of the outperformance of the economy.

Fitch Ratings has upgraded Cyprus's ratings by one notch to 'BB-' from 'B+', with a positive outlook and Standard and Poor's raised the island's ratings to BB+ with a positive outlook.

Moody's acknowledged that the Cypriot economy has shown resilience and outperformed all projections, but cited its reliance on services, the weakness of the banking sector because of the high ratio of bad loans and the high private and public debt as reasons for keeping its previous ratings.

It said these factors outweighed the economy's resilience and fiscal outperformance.

"Cyprus has a small and relatively undiversified economy, dominated by its service sector, which accounts for more than four-fifths of gross domestic product," Moody's said.

Cyprus is counting on returning to investment grade ratings to secure low-interest financing of its economy as it is returning to growth following its 10-billion-euro (10.85 billion U.S. dollars) bailout by the Eurogroup and the International Monetary Fund in March 2013.

It raised a loan of 1 billion euros earlier this year at an interest of 3.75 percent, the lowest after returning to the markets since the island had been shut out of international financing in mid-2011.

Moody's said Cyprus' sovereign debt was 107.5 percent of GDP in 2015, adding that while the debt is being reduced, the decline is expected to be slow.

On the positive side it noted that the debt is highly affordable, the rate of growth reached 2.7 percent during the first six months of this year and the public finances are sound.

Moody's said that if this trends continue for another 12 to 18 months an upgrading of Cyprus will be expected.

Cypriot economy outperformed all projections and has achieved a 2.7 percent growth in the first six months of this year after having been in the red for 12 consecutive quarters up to the last quarter of 2015.

But non-performing loans are the biggest problem the banks have to face, despite managing to bring their ration down by 9.6 percent to 18.44 billion euros at the end of June. Endit