Cyprus economy welcomes third vote of confidence within a month with S&P upgrade

More good news for the Cypriot economy has arrived with a third upgrade within less than a month, as rating agency Standard & Poor's upgrades the country's long-term credit rating to A- from BBB+ with a stable outlook, reflecting balanced risks to Cyprus' credit rating over the next 24 months.

This development is considered to be a significant achievement for the Cyprus economy, as its credit rating has now been placed in category "A" by all the leading rating agencies, Moody's, Fitch, and Standard & Poor's, as well as by Scope.

With the triple upgrade from Moody's, Fitch and S&P, Cyprus has gained a place among the most reliable economies in Europe, a fact that entails significant benefits for society.

The upgrade from S&P Global Ratings

More specifically, S&P Global Ratings upgraded Cyprus' long-term credit rating to "A-" from "BBB+" and affirmed the short-term rating of "A-2", adding that the outlook is stable.

According to the agency, the stable outlook reflects 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 dependence on short-term external financing of the Cyprus banking system has significantly reduced balance of payments vulnerabilities and potential fiscal risks.

As reported, economic activity in the country has shown a recovery, with GDP growth estimated at 3.7% in 2024, as services exports, particularly in the information and communications technology and tourism sectors, continued to perform well, despite increasing geopolitical tensions in the region and elsewhere.

The firm expects real GDP growth to fluctuate somewhat but remain stable, forecasting 3% growth in the period 2025-2027, driven by investment activity and private consumption, while NextGenEU projects and real estate activity are expected to support economic activity.

It is also reported that the potential completion of the liquefied natural gas terminal could reduce medium-term energy risk, while natural gas extraction is a long-term process.

As noted, the terminal is expected to be operational in early 2026 and according to some estimates could reduce energy costs for the country by around 30%. Accordingly, research and development in various natural gas fields within the exclusive economic zone of Cyprus are underway, with the possibility of first production in 2028.

Implementing reforms under NextGenEU will unlock grants and further support growth, it is further emphasised, as Cyprus is projected to receive up to €1.21 billion in the period 2021-2026, including €1.06 billion in grants, if it implements the agreed reforms.

The ratings house characterises Cyprus's debt profile as favorable, predicting that by 2026 the gross public debt to GDP ratio will fall within the Maastricht Treaty limit of 60% for the first time since 2010.

For Cypriot banks, it notes they have absorbed most of the losses related to the consolidation of their balance sheets. Furthermore, although still higher than in other countries, the sector's average non-performing loan ratio continued to decline, reaching 6.9% in the second quarter of 2024. 

According to the agency's favorable scenario, Cyprus's rating could be further upgraded if the increased current account deficit and residents' overall gross external financing needs were to further decrease, mitigating risks from external leverage, especially short-term external debt levels.

It could also raise ratings if the public debt burden falls beyond expectations.

On the other hand, the agency adds that it could downgrade Cyprus's rating in the unlikely scenario of a deep and prolonged economic shock, for example due to the potential impact of worsening geopolitical tensions.

Negative factors for the assessment could also arise if progress on structural reforms were delayed, leading to corresponding delays in Cyprus' funding from NextGenEU.

It is noted that last June, S&P upgraded Cyprus to BB+, with a positive outlook.

As mentioned above, the upgrade by Standard & Poor's follows the upgrades that preceded it in the immediate past period by Fitch and Moody's.

In a written statement following the upgrade by Standard & Poor's, the President of the Republic, Nikos Christodoulides, emphasises that the Cypriot economy is recording a significant achievement, as its creditworthiness is now rated in category "A" by all the leading rating agencies, Moody's, Fitch, and Standard & Poor's.

As the President noted, the upgrade by Standard & Poor's completes the cycle of ratings for 2024 and, following successive upgrades, our country consolidates its position among the most reliable economies in the European Union.

"The triple upgrade is the culmination of a coordinated and methodical strategy adopted by the Government. A strategy that focuses on fiscal responsibility, strengthening investments, stabilizing the financial system and promoting structural reforms," ​​Christodoulides emphasised.

At the same time, the President of the Republic adds, the new upgrade seals, confirms and rewards the country's determination to restore its prestige internationally, through the implementation of measures that consolidate transparency, legality and cooperation on issues such as the imposition of sanctions and active participation in international investigations to combat corruption.

The positive assessments, according to the President of the Republic, highlight both the significant progress that has been made in stabilising the economy and the financial system, but also the political will of the Government to behave responsibly, far from serving any expediency.

"The responsibility of all of us to support growth and social cohesion is fundamental. Banks, as pillars of the financial system, play a central role in shaping a sustainable economic environment," he pointed out.

Message to banks

In his written statement, the President of the Republic also sends a message to the banks, indicating that the state, institutions and citizens expect banking institutions to respond to the favourable conditions that the sacrifices of the Cypriot people made possible.  

"To support the economy and society by reducing lending rates and at the same time narrowing the gap between deposit and lending rates. Such a self-evident initiative will relieve thousands of households, enhance liquidity and investment activity, while at the same time sending a message of trust and support to society, strengthening the role of banks as allies of development," Christodoulides said.

This new success is the result of a collective effort, as society, citizens and businesses have shouldered the burdens of the path towards stabilisation and recovery. Citizens, with dedication, sacrifices and trust in the policies implemented, have been a key pillar in building Cyprus' economic credibility.

(Source: InBusinessNews)