Positive Outlook for Cyprus as CI Ratings Upgrades Sovereign Ratings
In a recent assessment by Capital Intelligence (CI Ratings), the sovereign ratings for Cyprus have been revised upwards, reflecting a robust fiscal performance and effective debt management strategies. CI Ratings highlighted a “faster than projected decline in general government debt” as a key factor in its decision, citing consistent primary fiscal surpluses and proactive debt management by the Cypriot government.
The agency also acknowledged significant progress in the banking sector, particularly in addressing non-performing loans (NPLs). This improvement has led to a substantial reduction in government contingent liabilities from the banking sector over recent years. As a result, the outlook on Cyprus’ long-term foreign currency rating (LT FCR) has been elevated to ‘positive’ from ‘stable’, while affirming the LT FCR and short-term FCR (ST FCR) at ‘BBB-‘ and ‘A3’, respectively.
Cyprus has demonstrated resilience in its economy, with a high GDP per capita, which continues to support its ratings. The benefits of European Union and eurozone membership, including financial support from the Recovery and Resilience Facility (RRF), have also been factored into the positive rating.
The general government debt to GDP ratio saw a decline to 77.3% in 2023 from 85.6% in 2022, driven by a primary budget surplus that exceeded projections. CI Ratings anticipates that the government’s debt dynamics will remain favorable, with the debt-GDP ratio projected to decrease further to 66.2% by 2025.
Despite the challenging external environment and tight global financial conditions, the Cypriot government has managed its debt maturity profile effectively, reducing refinancing risks and maintaining an increasing cash buffer to counter short-term shocks.
However, risks to the fiscal outlook still exist. CI Ratings cautions that outcomes could be weaker than expected if fiscal discipline wanes or if there is increased spending on subsidies, social welfare, and public sector wages. The cost of the national health system (GESY) and potential declines in tax revenues due to adverse GDP growth are other concerns.
Nevertheless, CI considers the impact of high-risk premia and tight eurozone monetary policy on public finances to be manageable, thanks to the decline in general government debt and a high proportion of fixed-rate debt.
The banking sector’s strength has seen considerable improvement, with the Central Bank of Cyprus reporting a further decline in the aggregate NPL ratio and an increase in accumulated provisions. While asset quality risks remain due to elevated debt levels in the household and corporate sectors, banking sector capital adequacy is sound.
Economic growth in Cyprus remains positive, with real GDP estimated to have expanded by 2.5% in 2023. Looking ahead, CI expects real GDP to continue growing, supported by improving domestic demand and investment activities fueled by RRF funding and foreign private capital inflows.
CI Ratings concludes that comprehensive structural reforms, improved revenue mobilization, increased institutional strength, and speedier resolution of transferred NPLs could potentially lead to an upgrade in Cyprus’ ratings within the next 12 to 24 months.
