Rating Agency Capital Intelligence Ratings (CI) has upgraded Cyprus’ Long-Term Foreign Currency Rating (LT FCR) and Short-Term FCR (ST FCR) to ‘BBB’ and ‘A2’, respectively, from ‘BBB-’ and ‘A3’, maintaining a positive outlook.

The Limassol-based regional rating agency cites the continued improvement in the island’s public finances, persistent budget surpluses and rapid decline of public debt.

“The upgrade reflects the continued improvement in the public finances, including persistent budget surpluses and a rapid decline in general government debt, with the debt to GDP ratio projected to drop below 60% in 2026,” CI ratings said.

According to the agency, the government continues to manage its debt maturity profile in order to reduce refinancing risks while maintaining an increasing cash buffer to counter short-term shocks and external adversities.

“The upgrade takes into consideration the significant decline in macro-financial imbalances, with the size of the banking sector declining to around 200% of GDP, and the cumulative debt overhang in the non-financial corporate and household sectors halving in recent years,” CI added.

The agency also highlighted “the demonstrated resilience of the Cypriot economy against increasing geopolitical risk factors, as well as the significant progress made in strengthening bank balance sheets by clearing up non-performing loans (NPLs) and reducing reliance on wholesale and cross border funding.”

“As a result, government contingent liabilities from the banking sector have declined markedly in recent years,” CI said.

Furthermore, CI views that the targets outlined in the government’s medium-term debt strategy for 2024-26 are attainable and continue to ensure debt sustainability.

According to the agency, the general government budget performance remained very strong in the first seven months of 2024, with the budget position (on a cash basis) posting a higher than projected overall surplus of 2.2% of GDP (compared to 1.2% in 2023).

“As a result, CI expects the general government budget position to post a surplus of 2.9% of GDP in 2024, despite the adjustment of public sector wages,” the agency said.

Noting that short-term refinancing risks continue to decline, CI said that this is due to the government’s sound fiscal management, favourable debt maturity structure, and low gross financing needs (3.7% of GDP in 2024), as well as the prudent building of cash buffers of almost 10% of GDP that cover over 200% of gross financing needs for at least the next 12 months.”