During these very difficult financial times, Fitch, one of the “Big Three credit rating agencies” in the World, maintained Cyprus’ long-term credit rating at BBB. However, the outlook revision from positive to stable, reflects the significant impact of the coronavirus pandemic on the Cypriot economy and the sovereign’s fiscal position.
Fitch forecast a GDP contraction of more than 2% in 2020 reflecting the material negative impact of the health crisis on the global economy. However, risks to this baseline forecast are tilted firmly to the downside, as it assumes that the coronavirus can be contained in 2020, leading to a relatively strong economic recovery in 2021.
The agency expects a significant deterioration in the budget balance, but also an increase in public debt, due to the economic recession and deficits in public finances, as a result of the pandemic. The materialisation of contingent liabilities into the sovereign balance sheet remains a risk, taking into consideration the financial system which is still in a fragile situation and the downside risks to the economic outlook.
Eurozone GDP is expected to fall by 4.2% in 2020, followed by a 2.9% growth in 2021. Fitch notes that there is an unusually high level of uncertainty around them and that risks are steadfastly to the downside. Therefore, Fitch anticipates that the global economy will experience a deep but short-lived recession in 2020 due to the COVID-19 pandemic.
However, Fitch predicts that the economy of Cyprus demonstrates flexibility, proved for example by the fall in unemployment to close to pre-crisis level to drive the recovery after the severe short-term shock. The GDP growth forecast is highly uncertain in 2021, but afterwards it is expected that the GDP growth will gradually converge to 2% medium term growth potential.
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