Morningstar DBRS ratings confirmed Friday the Republic of Cyprus' Long-Term Foreign and Local Currency - Issuer Ratings at BBB (high). The trend on the Long-Term ratings has been changed to Positive from Stable.

At the same time, Morningstar DBRS confirmed the Republic of Cyprus' Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (low). The trend on all Short-Term ratings remains Stable.

A press release issued late on Friday evening says that the Positive trend reflects Morningstar DBRS' view that public debt metrics are likely to continue to improve. The general government debt-to-GDP ratio decreased from 99.3% in 2021 to 77.4% in 2023.

''Looking ahead, the European Commission (EC) forecasts general government debt to decline further to 65.4% of GDP in 2025 on the back of strong economic growth and fiscal surpluses. Economic growth is likely to continue to benefit from robust private consumption, rising service exports and strong construction investment over the next few years'', the press release reads.

The EC forecasts real GDP in Cyprus to grow by an average of 2.9% in 2024 and 2025, compared to a growth rate of 1.1% for the Euro Area. Favourable growth and employment developments, in turn, are projected to bolster tax revenues and social security contributions.

Morningstar DBRS also points out that during the first seven months of 2024, general government revenues grew by a large 14.2% on a year-on-year basis, driven by higher income taxes and social contributions,  which clearly exceeded the 9.4% increase in public spending.

Morningstar DBRS takes the view that government accounts are likely to continue to benefit from strong, albeit decelerating, revenue growth which will offset moderate spending pressures arising from rising public wages, ageing-related expenditure and the roll-out of the mortgage-to-rent scheme.

Cyprus' BBB (high) ratings, the press release notes, are supported by a stable political environment, the government's sound fiscal and economic policies in recent years, and a moderate interest burden.

''On the other hand, the credit ratings of Cyprus continue to be constrained by the small size of its service-driven economy, which renders it vulnerable to external shocks. Cyprus also faces significant challenges due to a legacy stock of NPLs in the banking sector and the economy's still comparatively low level of labour productivity'', the press release adds.