The Finance Ministry is contemplating a return to financial markets in the near future, aiming to capitalise on the Cypriot economy’s positive momentum, which has been further reinforced by successive credit rating upgrades, according to reports.
According to sources cited by the Cyprus News Agency (CNA), there are indications that the ministry’s goal is to issue a ten-year bond.
However, the specifics, including the final amount to be raised, will be determined in consultation with the issuance advisors and based on prevailing market conditions.
The Public Debt Management Office (PDMO) has previously announced this year’s annual financing programme, which totals €1.3 billion, with €1 billion to be covered through the issuance of a European Medium-Term Note (EMTN).
As noted in the PDMO’s 2023 annual report, the intention for the coming years is to issue at least one benchmark bond (EMTN) annually, raising between €1-1.5 billion to meet the government’s financing needs.
The PDMO’s overarching objective remains the smoothing of the debt maturity curve, emphasising the issuance of longer-term bonds, given favourable market conditions and the new interest rate environment, as detailed by the PDMO.
Sources believe that the current environment is advantageous following the upgrades by Fitch and Standard and Poor’s, which elevated Cyprus’ long-term credit rating to BBB+, maintaining positive outlooks. Moody’s also maintained a positive outlook, keeping its rating at ‘BBB’ as of the end of last month.
Contributing to the favourable conditions is the steady decline of the debt-to-GDP ratio, driven primarily by the growth rate, which in the first quarter of the year was the second highest in the EU on a quarterly basis (1.2 per cent) and the third highest on an annual basis (3.4 per cent seasonally adjusted) behind Malta and Croatia.
The initial plan to return to the markets was scheduled for a few weeks ago, but statements by the leaders of France and Germany about the possibility of sending troops to Ukraine caused market turmoil, discouraging an immediate return to the international markets.
Most recently, credit rating agency Standard and Poor’s (S&P) upgraded Cyprus’ long-term credit rating to ‘BBB+’ from ‘BBB’, with a positive outlook. The short-term rating has been affirmed at ‘A-2’.
In its announcement, S&P highlighted that Cyprus recorded the highest consolidated fiscal surplus in the eurozone last year.
In its report, the agency projects that, by 2027, public debt will fall below 60 per cent of GDP, based on stable growth and fiscal prospects and the expectation that the government will achieve its fiscal surplus targets.
It further explained that despite longstanding non-performing loans in the financial system, Cyprus’ predominantly foreign-owned banks have turned a corner in terms of profitability and capitalisation, reducing the risk of potential liabilities for the government.
According to S&P, the positive outlook reflects the upward pressures on sovereign ratings as Cyprus’ fiscal and economic outcomes outperform those of comparable countries.
“In our view, the strengthened financial position of Cyprus’ banking system should lead to greater convergence of domestic financing conditions with those of the broader euro area, with potential positive impacts on ratings,” the agency stated.
“The upgrade reflects the progress Cyprus has made in recent years in addressing fiscal imbalances amidst resilient growth,” the agency added, noting that it expects general government gross debt to fall “below the Maastricht Treaty threshold of 60 per cent by 2027”.
Additionally, S&P reported that last year, the consolidated government surplus reached 3.1 per cent of GDP.
It described this performance as “above our previous expectations, driven by increased employment levels, strong private sector consumption, and the ongoing gradual introduction of higher social security contribution rates”.
“Despite spending pressures, we continue to believe that the government will be able to average a consolidated fiscal surplus of 2.1 per cent of GDP during 2024-2027, the strongest forecast among the 20 eurozone members,” it added.
Regarding the banking sector, S&P commented that the improved credit rating for Cyprus reflects the enhanced economic standing of Cypriot banks, which have long influenced the agency’s assessment of the government’s creditworthiness in the aftermath of the 2012-2013 financial crisis.
Moreover, after last year’s slowdown to 2.5 per cent, S&P anticipates that growth will accelerate again to 3 per cent for the period 2024-2027.
The agency also mentioned that economic activity in Cyprus has diversified significantly in recent years, allowing the country to mitigate the impacts of the global pandemic in 2020-2021, subsequent EU sanctions against key trading partners in 2022, and the recent conflict in Israel.
In addition, S&P stated that the successful implementation of structural reforms under the Recovery and Resilience Plan is likely to be key to further growth.
Commenting on the upgrade by S&P, the Finance Ministry took to social media platform X (formerly Twitter) to say that this “reflects the progress Cyprus has made in recent years in addressing fiscal imbalances amidst resilient growth”.
The ministry added that “their improved assessment also reflects the strengthening of the financial position of Cypriot banks and the progress they have made in balancing their funding profiles in recent years, as well as the reduction of public debt and the expectation that it will fall below 60 per cent of GDP”.
“It should be noted that S&P is the third rating agency to upgrade Cyprus recently (with Fitch upgrading the credit rating on June 7 and Moody’s changing the outlook to positive on May 24),” the ministry further explained.
President Nikos Christodoulides also welcomed the latest upgrade of Cyprus’ credit rating by S&P, noting that this marks the fifth upgrade since his administration took office.
In a written statement, Christodoulides said that “the government will continue with the same determination to implement the economic policy that enables it to effectively support vulnerable groups of the population, while also strengthening the middle class and businesses”.
He also noted the “significance of S&P’s projection of Cyprus having one of the highest growth rates in the EU for the period 2024-2027, despite serious challenges at the European and global levels due to the ongoing conflicts in Ukraine and the Middle East”.
He highlighted that the upgrade of the Republic of Cyprus’ credit rating from BBB to BBB+ with a positive outlook “demonstrates the correctness of the government’s economic policy, which is based on the triptych of fiscal responsibility, financial stability, and continuous reforms”.
Finally, Christodoulides mentioned that access to international markets and attracting foreign investments are essential components for maintaining the growth trajectory of the Cypriot economy.
