Nicosia said its economic policies were vindicated after Standard & Poor's raised Cyprus' credit grade by a notch to BBB-, lifting the country back into investment grade after near-bankruptcy five years ago.
“Returning to investment grade after 6.5 years is the strongest confirmation of prudent management we have followed and are following, “tweeted President Nicos Anastasiades on Saturday.
He added: “Our economy is recovering with the best omens and that has been confirmed.”
The international rating agency pointed Friday to Cyprus government efforts that have slashed the banking sector's bad loans from around half of all loans to one-third.
It cited moves to carve out bad loans from state-owned Cyprus Co-Operative Bank that were subsequently sold to Cyprus-based Hellenic Bank, the sale of bad assets by top lender Bank of Cyprus and new legislation helping banks to further reduce such loans.
The agency said strong growth of around 3 percent of gross domestic product over the next three years will help drive down public debt. But it added that high public and private indebtedness remain a ratings constraint.
S&P were one of the first credit rating agencies to downgrade Cyprus’ ratings to junk, in January 2012.
The rating agency notes that Cypriot authorities have carved out the bad assets of the country`s second-largest bank, paving the way for a significant reduction in the banking sector`s nonperforming assets.
S&P further anticipate that strong economic growth through 2021, prudent policymaking, and only moderate state support to the banking system will allow the government to run budgetary surpluses and prompt a reduction in public debt.
They say they could consider raising the ratings on Cyprus over the next two years if the economy deleveraged significantly, or if the banking sector reduced its nonperforming exposures (NPEs) materially and its financial conditions improved.
The ratings could come under pressure if economic growth is significantly lower than the projections, endangering private debt service and further financial sector improvements, or if contrary to the expectations, the general government debt burden rises substantially, the credit rating agency adds.
Ratings on Cyprus are constrained by the economy`s high indebtedness reflected both in its public and private balance sheets, the still-high proportion of NPEs in the banking system, and Cyprus` small size relative to other eurozone member states.
The rating agency projects that the Cypriot economy will grow by 4% in 2018 and by 3% on average between 2019 and 2021. Real GDP growth by 4% in 2018, will allow a return to the economy’s 2011 pre-crisis size, it added.
S&P said the Cypriot private sector balance sheet is among the most indebted in Europe, at about 240% of GDP at the end of 2017 and is likely to remain high over the medium term.
S&P notes that talks around the reunification of Cyprus still appear to be at a standstill, while they do not anticipate in their base scenario an escalation of tensions between Turkey and Cyprus over offshore exploration in the eastern Mediterranean Sea.
