Scope Ratings has upgraded Cyprus’ long-term issuer and senior unsecured debt ratings to A- from BBB+, signaling a notable milestone as the country’s first A-level rating from a major credit agency.

This rating shift reflects the Republic’s strengthened fiscal outlook, resilient economic growth, and reduced financial sector risks, accompanied by a stable outlook for the future, the rating agency noted. The short-term issuer rating has also been upgraded to S-1 from S-2, underscoring Cyprus’s positive macroeconomic fundamentals and improved financial stability.

The upgrade of Cyprus’ credit rating by Scope Ratings to A- is underpinned by strong fiscal performance and a robust economic growth outlook. Cyprus has achieved consistent primary surpluses, with its debt-to-GDP ratio declining significantly from a peak of 115% in 2020 to 77.3% in 2023, the Agency said.

This trend is expected to continue, with the debt projected to fall below 60% by 2026 and below 50% by 2029. Scope’s projections indicate a fiscal surplus of 3.1% of GDP for 2024 and 3.0% for 2025, with prudent budgetary policies supporting an average surplus of 1.8% from 2026 to 2029. Additional buffers, such as cash reserves exceeding 10% of GDP, provide resilience against potential external shocks.

As Scope noted, Cyprus’s GDP growth, forecasted at 3.2% in 2024, outpaces the euro area average, positioning Cyprus as a strong performer among its peers. Demand growth, fueled by declining inflation, low interest rates, and an unemployment rate of 4.6%, supports this trajectory. Key sectors, including tourism, financial services, and construction, contribute significantly, while the information and communications technology (ICT) sector further diversifies the economy. Public investment, backed by the EU’s Recovery and Resilience Plan, is expected to further bolster growth through 2026, with potential natural gas production beginning in 2026 contributing to economic diversification and energy security.

The banking sector in Cyprus also shows increased stability, says the rating agency, with notable improvements in profitability, asset quality, and liquidity. Financial system risks are gradually diminishing, with steady progress made since the 2012-2013 crisis. Non-performing loans (NPLs) have declined, signaling a more positive outlook despite remaining relatively high by euro area standards. The banking sector benefits from the boost in profitability driven by higher interest rates, along with stronger capital reserves. Additionally, the implementation of a foreclosure framework is helping banks reduce NPLs, contributing to the continued stabilization of Cyprus’s financial sector.

Challenges and constraints

According to Scopes, despite these positive developments, Cyprus’s A- rating is tempered by challenges related to its small, open economy and large external imbalances. High dependence on foreign workers, energy imports, and externally-driven sectors makes Cyprus vulnerable to external shocks, while persistent current account deficits highlight a reliance on foreign capital. Cyprus’s high net external debt is another constraint on its credit profile.

Scope has assigned a stable outlook for Cyprus, suggesting balanced risks over the next 12 to 18 months. Potential for an upgrade would depend on continued progress in reducing external imbalances and further decreasing NPLs. Conversely, loosening of fiscal policies, rising external imbalances, or a resurgence of vulnerabilities in the banking sector could exert downward pressure on the rating.

It is also noted that as a small island nation, Cyprus faces challenges due to its high carbon dependency, while its social metrics are impacted by issues such as youth unemployment. Governance scores are supported by stable political structures but constrained by regional geopolitical tensions.