Photographer: Simon Dawson/Bloomberg

Cyprus Looks to Shed Junk Rating With Economic Rebound Story

  • Cyprus says its bonds represent opportunity amid low returns
  • Divergence with Greek borrowing costs on economic fundamentals

Cyprus wants investors to see it as a comeback kid.

With an accelerating economy, the island nation that was forced to seek a bailout and impose a levy on bank deposits in 2013 is betting on an end to its junk rating. That should make it an attractive place for investors, the country’s leaders are saying.

“What has been achieved is nothing short of a remarkable recovery - a rebound which came much sooner than anyone was expecting, ” Finance Minister Harris Georgiades told investors in New York on March 22.

Getting an investment-grade rating for the country’s debt is key to Cyprus’s ability to qualify for the European Central Bank’s asset purchases and to pave the way for sustainable market access. S&P Global Ratings on March 17 raised its long-term credit rating for Cyprus to BB+ from BB, one notch below the rating agency’s investment grade, citing stronger-than-expected economic growth and fiscal progress. Cyprus is also still rated below investment grade by Moody’s and Fitch.

Cyprus’s economy grew 1.7 percent in 2015, returning to growth after three years of recession, and expanded 2.8 percent in 2016, according to initial estimates by the Statistical Service of Cyprus.

The healthy pace of growth is expected to continue in the medium term, supported by tourism, investments and private consumption while potential positive catalysts for the economy are related to possible reunification and exploration for new natural gas deposits in offshore areas, according to Axia Research analysts Constantinos Zouzoulas and Damiani Papatheodotou.

Proof of Confidence

“The fact that secondary market yields of Cyprus’s 10-year government bond are trending downwards, and are now close to 3 percent is the ultimate proof of confidence for the Cyprus economy,” Irena Georgiadou, Chairwoman of Hellenic Bank Pcl, said in an interview. “At the same time, in the low-return global environment, Cyprus sovereign bonds represent a great opportunity for investors.”

Cyprus exited its 10 billion-euro ($10.7 billion) bailout program ahead of schedule in March last year, after using just 7.3 billion euros of its loan, before selling 1 billion euros of its seven-year bonds in July in the country’s first venture into the international debt market without a bailout safety net.

“Cyprus is a solid turn-around economic story,” Ioannis Gkionis and Galatia Phoka, research economists at Eurobank in Athens said in a March 21 note. Cyprus is currently the only economy in the euro-area periphery with a positive outlook by both Moody’s and Fitch which implies a possible rating upgrade, provided that the government stays focused on structural reforms, they said.

Not Greece

The divergence between the borrowing costs of Greece and Cyprus reflects the two countries’ fundamentals, according to Michalis Kyrou, Manager, Institutional Wealth Management and Global Markets at Bank of Cyprus Holdings Plc in Nicosia.

“Cyprus has successfully concluded its obligations under its MoU, in contrast with Greece, which still struggles,” he said. “Additionally, the disconnection of the two economies, and the effective ring-fencing of Cypriot fundamentals from the effects of Greece since three years ago, contributes to the divergence of these borrowing costs.”

Yields on Cyprus’s benchmark 10-year bond have fallen over 21 basis points since the beginning of the year to around 3.20 percent compared with a 7.2 basis points fall for Greece’s ten-year bond to around 6.86 percent, according to Bloomberg data.

Cyprus should do much more to persuade credit agencies to upgrade at investment grade in order to further decrease borrowing costs, Kyrou said. Credit agencies aren’t convinced that the country can proceed with further reforms without pressure from the International Monetary Fund and European partners and “our hope is that such reforms will be further accelerated in 2017,” he said.

More Needed

Cyprus aims to stick to plans to sell a stake in Cyprus Telecommunications Authority in 2017, to privatize the state lottery, begin the process for privatizing the Cyprus Stock Exchange as well as complete the concession agreement process for selection of a private operator for Larnaca Port.

While Cyprus has exited its bailout, its lenders have to carry out post-program monitoring until the country repays 75 percent of the money it owes.

The country can’t rest on its laurels, says Demetris Georgiades, chairman of Cyprus’s Fiscal Council, which reports on potential risks for the Cypriot economy. The size of public and private debt, together with a very high level of non-performing loans in the banking sector, makes the economy “extremely vulnerable” to shocks and leaves no room for complacency, he said.

Still, investors can see the progress Cyprus has made, Japonica Partners founder and Chief Executive Officer Paul Kazarian said in an interview in Athens.

“Cyprus has achieved spread compression without being in the ECB’s QE program, or having investment grade, as it has regained trust and confidence, and Greece should look to it as an example,” he said.

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