Standard and Poor's have upgraded Cyprus long-term ratings to 'BBB+' from 'BBB' and assigned a positive outlook, while affirming the short-term rating at 'A-2'.

In a press release the credit rating agency said that Cyprus posted the highest consolidated fiscal surplus in the eurozone last year and by 2027 the government debt stock will fall below 60% of GDP, in line with solid growth and fiscal prospects and our expectation that the government will largely meet its budgetary surplus targets.

"Despite lingering legacy nonperforming loans in the financial system, Cyprus' predominantly foreign-owned banks have turned a corner in terms of profitability and capitalization, reducing their contingent liability risk to the government," it noted.

S&P Global Ratings raised its long-term foreign and local currency sovereign credit ratings on the Republic of Cyprus to 'BBB+' from 'BBB'. The outlook is positive. At the same time, it affirmed the short-term foreign and local sovereign credit ratings at 'A-2'. The transfer and convertibility assessment remains at 'AAA'.

The positive outlook, the credit rating agency said reflects upward pressure on the sovereign ratings, as fiscal and economic outcomes outperform peers. "In our view, the strengthening financial position of Cyprus' banking system should lead to greater convergence of domestic financing conditions to that of the broader euro area, with potential positive ratings implications," it added.

"The upgrade reflects the progress Cyprus has made in recent years to address fiscal imbalances, amid resilient growth. We project gross general government debt will fall below the Maastricht treaty threshold of 60% by 2027," it noted.

The agency said that last year, the consolidated government surplus came in at 3.1% of GDP--"above our prior expectations--thanks to increasing employment levels, buoyant private sector consumption, and the ongoing phasing in of higher social security contribution rates. Despite expenditure pressures, we still think the government will be able to average a consolidated budgetary surplus of 2.1% of GDP over 2024-2027, our strongest forecast across all 20 eurozone members".

Referring to banks, it said that "our improved assessment of Cyprus' creditworthiness also reflects the strengthening financial position of Cypriot banks, which have long weighed on our assessment of the government's creditworthiness in the wake the 2012-2013 financial crisis".

Moreover, it noted that following last year's deceleration to 2.5%, "we think growth will pick up again to average 3.0% over 2024-2027," adding that economic activity has been increasingly diversified in recent years, allowing Cyprus to shrug off the impacts of the 2020-2021 global pandemic, followed by the 2022 imposition of EU sanctions against key trading partners, as well as the latest Israel-Hamas war.

Successful implementation of structural reforms under the Recovery and Resilience Plan are likely to be key to unlocking further growth, the credit rating agency noted.