Cyprus a “potential rising star” for credit rating boost (updated)

Cyprus has been identified as a “potential rising star” for the rise of its credit rating in the investment category, according to a report released on Monday by global rating agency Moody’s.

The agency cited the significant improvement in the public debt-to-GDP ratio as a key factor in the positive outlook for Cyprus. The remarks were included in Moody’s report on “fallen angels”, which includes states that saw their credit rating drop to the “junk” category and their subsequent return to the investment category.

What is more, the agency’s report notes that there are “two potential rising stars” in the upgrade zone in the investment category, Cyprus and Paraguay.

“Potential rising stars” are the states for which the agency has a Ba1 credit rating with a positive outlook. The report highlights the progress made by Cyprus in reducing its public debt-to-GDP ratio and the prudent fiscal policy of Paraguay as key drivers of their credit rating upgrades.

Moody’s upgraded Cyprus’ credit rating to Ba1 in July 2021, an assessment that was further confirmed on August 19, 2022, with the agency assigning a positive outlook from stable.

However, the agency chose not to issue an appraisal act on March 31, 2023, a date that, based on European regulation (CRA3), it had announced as a potential appraisal date. The next potential rating release is set for September 29.

The report emphasised the fact that the states that saw their credit rating return to the investment category demonstrated significant transformation, including institutional improvements, strengthened public finances, and prospects for higher sustainable growth.

Moreover, Moody’s noted that twelve of the states that returned to the investment category took a period of time ranging from less than 3 to about 14 years to do so.

Cyprus’ credit rating has been in the non-investment category for 11 years since March 2012, while Moody’s had downgraded the rating of the Cypriot bond up to Caa3, which is considered an extremely speculative category, at the beginning of 2013, a few months before the agreement to save the Cypriot economy with the support package from the EU and the International Monetary Fund (IMF).

However, it should be noted that the rest of the international rating agencies recognised by the European Central Bank (ECB) have already upgraded the Cypriot bond to the investment category for almost five years now.

Standard and Poor’s upgraded the credit rating to BBB- in September 2018, Fitch in October 2018, and DBRS Morning Star in November 2018. The current rating of all three agencies is one notch above the investment grade threshold.

The improvement in Cyprus’ credit rating reflects the country’s steady economic recovery following the 2012 financial crisis, which saw it being bailed out by the EU and the IMF.

The country’s government has implemented a series of reforms to improve the economy’s competitiveness and attract foreign investment. Cyprus’ economy has also been boosted by a thriving tourism sector and a growing interest from overseas investors in real estate.

Commenting on the news, former Finance Minister Constantinos Petrides said that this is the result of the previous government’s sound financial management.

“Other rating agencies have already upgraded Cyprus to investment grade – Moody’s is the last remaining agency to not have done so,” Petrides said in a statement.

“For the upgrades to continue, there must be sustainable growth combined with healthy public finances. This is not easy, nor does it happen automatically,” he said.

“In fact, we managed to do it both by strengthening the welfare state and promoting economic development,” he went on to say, noting that  “this course should continue by officially setting as a medium-term objective to reduce public debt, setting quantitative targets and milestones”.