The international rating agency Moody’s Investors Service raised the credit rating of Cyprus to the Va3 level. The outlook for the rating remains positive, which signals for further increase in the coming months. Moody’s emphasizes that Cyprus’s economic sustainability is improving, and positive trends will continue in the medium term. The fiscal position of the country is improving as fiscal prospects remain favorable.
After three years of shrinking, the Cypriot economy returned to growth in 2015, expanding by 1.7%, followed by acceleration to 2.8% in 2016.
“We expect this pace to remain in the medium term, driven primarily by private consumption, backed by favorable developments in the tourism sector and the labor market”, said Moody’s.
Tourism industry, accounting for about 13.2% of gross value added, registered a 20% increase to about 3.2 million people in 2016. The tourism revenue also reached new heights to about 2.4 billion EUR in 2016.
“Tourism activity started very strongly 2017 and we expect tourism to remain one of the main drivers of the growth of the Cypriot economy. The country’s tourism also benefits from the political crisis in Turkey and the geopolitical problems in North Africa”, states the credit rating agency. “The industry retains several comparative advantages, including significant geographic diversification when tourists arrive, providing a buffer against negative external macroeconomic shocks elsewhere”, adds Moody’s.
Improving the economic outlook is also reflected in the labor market. The Cypriot labor market has shown flexibility in terms of wage adjustment during the crisis, a factor that has helped accelerate employment recovery and strengthen external competitiveness. While unemployment remains at 11% since May 2017, it dropped from a peak of 16.8% in January 2015, seasonally adjusted Eurostat data show. The employment rate increased to 63.3% in the first quarter of 2017, one of the highest since 2012.
Moody’s expects the investment growth in the entire economy to continue to recover gradually, despite the limitations on domestic credit growth as a result of the large number of non-performing loans in the banking system and high corporate indebtedness. The investments are supported by access to European structural and investment funds.
The rating agency recalls that Cyprus has successfully resumed the rescue program in 2013, using 7.3 billion EUR of the projected 10 billion EUR of aid from the country’s international creditors. In June 2016, the Council of the EU also closed the excessive deficit procedure, which was launched in July 2010.
Cyprus continues to outperform its fiscal targets. The primary surplus rises to 3% of GDP in 2016 and the fiscal surplus reaches 0.4%, which means that a structural fiscal adjustment of 5.2 percentage points over the period 2012-2016 has been achieved.
The government’s medium-term fiscal plan takes an absolutely neutral position. The surplus is expected to remain at 0.4% of GDP by 2019. The country’s debt is projected to decline from 108% from 2016 to 95% by 2020.