S&P Global Ratings raised on 13 December its long-term sovereign credit ratings on Cyprus to "A-" from "BBB+" and affirmed its short-term rating of "A-2", adding that the outlook is stable.

According to the agency, the stable outlook reflects the balanced risks to Cyprus' creditworthiness over the next 24 months. As noted, on the one hand, geopolitical tensions in the country's periphery could weigh on growth and stability; on the other hand, the increasing resilience and reduced dependency on short-term external financing of Cyprus' banking system has significantly reduced balance-of-payment and contingent fiscal vulnerabilities considerably.

It is added that economic activity in the country has shown signs of recovery, with GDP growth estimated at 3.7% in 2024, as service exports, in particular information and communications technology and tourism, have continued to perform well, despite the rise in geopolitical tensions in the region and elsewhere.

The agency expects real GDP growth to moderate to some extent but remain solid, projecting growth of 3% over 2025-2027, driven by investment activity and private consumption, while NextGenEU projects and real estate activity are likely to support activity.

It is also stated the eventual completion of a delayed LNG terminal could ease medium-term energy risk, while gas extraction is a long-term play. It is noted that the terminal should be operational by early 2026, which some estimates suggest it could reduce energy costs by about 30% while being cleaner. Separately, exploration and development in several gas fields within Cyprus' exclusive economic area are ongoing, with the potential for first output in 2028.

Enactment of reforms under NextGenEU would unlock grants and further support growth, it is further stressed, as Cyprus is slated to receive up to €1.21 billion over 2021-2026, including €1.06 billion in grants, if it implements agreed-upon reforms

The agency describes Cyprus' debt profile as favourable, projecting that by 2026 gross government debt to GDP will fall within the Maastricht Treaty threshold of 60% for the first time since 2010.

Cypriot banks have absorbed most of the losses associated with the resolution of their balance sheets, continues the agency, adding that although still higher than peers, the sector's average NPL ratio has continued to decline, reaching 6.9% at second-quarter 2024.

According to the agency’s upside scenario, the ratings on Cyprus could be raised if the very elevated current account deficit and residents' overall gross external financing needs were to narrow further, easing risks from external leverage, short-term external debt levels in particular. It could also raise the ratings if the government's debt burden were to decrease beyond our expectations.

On the other hand, the agency adds it could lower the ratings on Cyprus in the unlikely scenario that the economy suffered a deep and prolonged economic shock, for instance due to the potential fallout from worsening geopolitical tensions. Downward rating pressure could also materialize if structural reform progress were to stall, leading to delays to Cyprus' NextGenEU funding.