Investor Presentaiton
C. Operating Environment (continued)
The banking sector has undergone significant restructuring since the financial crisis of 2013. Banks have reduced their
foreign exposures, significantly shrunk their balance sheets, increased their capital buffers, and restructured and refocused
their domestic operations. Prudential supervision has been strengthened and a new legal framework for private debt
restructuring, including the sale of loans, is now in place. Total non-performing exposures (NPEs) at the end of November
2022 amounted to €2.7 billion, or 10.5% of gross loans. NPEs at the end of 2021 amounted to € 3 billion or 11.1% of gross
loans. 47.8% of total NPEs at the end of November 2022 were restructured facilities and the coverage ratio was 52.2%.
Private debt has continued to decline since mid-2012, shrinking by more than half by the end of December 2022. The
decline reflects the long process of deleveraging since the start of the financial crisis and includes the sale or transfer of
non-performing loans in recent years. Private debt, as measured by loans to residents excluding the government, stands
at 80% of nominal GDP at the end of December 2022. Pure new business lending, which excludes renegotiated amounts,
reached €3.1 billion in 2022 as a whole, exactly the same level as pure new lending in 2019.
Cyprus' current account deficit narrowed from 10.1% of GDP in 2020 to 6.8% in 2021 and is estimated at 9.6% in 2022
according to the European Commission's autumn forecast. From 2023 onwards, the deficit is expected to gradually narrow
as services revenues recover and EU recovery and resilience funds are credited to the secondary income account.
However, the current account deficit will remain higher than pre-pandemic levels in the medium term, partly due to strong
import growth linked to higher energy prices and EU investment plans, which will weigh on the trade balance. The size of
the country's deficits is partly structural, a consequence of special purpose vehicles domiciled in Cyprus.
Sovereign ratings
The sovereign risk ratings of the Cyprus Government improved considerably in recent years reflecting reduced banking
sector risks, and improvements in economic resilience and consistent fiscal outperformance. Cyprus demonstrated policy
commitment to correcting fiscal imbalances through reform and restructuring of its banking system. Public debt remains
high in relation to GDP but large-scale asset purchases from the ECB ensure favourable funding costs for Cyprus and
ample liquidity in the sovereign bond market.
Most recently, in October 2022, DBRS Morningstar affirmed the Republic of Cyprus's Long-Term Foreign and Local
Currency - Issuer Ratings at BBB (low) and maintained the trend Stable. The affirmation is supported by a stable political
environment, the government's sound fiscal and economic policies and the favourable government debt profile. The stable
outlook balances recent favourable fiscal dynamics against downside risks for the economic outlooks (including further
escalation of the crisis in Ukraine).
In September 2022, S&P Global Ratings upgraded Cyprus' investment grade rating of BBB/A-2 and has changed the
outlook from positive to stable. The upgrade reflects the resiliency of the Cypriot economy to recent external shock (including
the COVID-19 pandemic). The stable outlook balances risks from the crisis in Ukraine and the economy's diversified
structure and the expectation that the government's fiscal position will continue to improve.
In September 2022, Fitch Ratings affirmed Cyprus' Long-Term Issuer Default rating at investment grade BBB- since
November 2018 and stable outlook. The stable outlook reflects the view that despite Cyprus' exposure to Russia through
its tourism and investment linkages, near-term risks are mitigated by a strengthened government fiscal position, and
continued normalisation of spending after the pandemic shock. Meanwhile, medium-term growth prospects remain positive
on the back of the government's Recovery and Resilience Plan (RRP).
In August 2022, Moody's Investors Service affirmed the Government of Cyprus' long-term issuer and senior unsecured
ratings to Ba1 and changed the outlook from stable to positive. The key drivers reflecting the affirmation are the strong
reduction in Cyprus' public debt ratio in 2022, stronger-than expected economic resilience to Russia's invasion of Ukraine
and the COVID-19 pandemic as well the ongoing strengthening of the banking sector.
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