Agency points to fiscal strength and economic growth for latest upgrade

Cyprus has received a credit rating upgrade from Morningstar DBRS, which raised the country’s long-term foreign and local currency issuer ratings from BBB (high) to A (low), maintaining a positive outlook.

The agency also confirmed Cyprus’ short-term ratings at R-1 (low) with a stable trend.

According to Morningstar DBRS, this upgrade reflects the substantial reduction in public debt over recent years and the expectation that Cyprus’ debt indicators will continue to improve significantly.

The general government debt-to-GDP ratio decreased from 96.5 per cent in December 2021 to 69.7 per cent in September 2024, driven by large fiscal surpluses and strong nominal GDP growth.

Looking ahead, the European Commission forecasts a further decline in public debt to 56.7 per cent of GDP by 2026, supported by favourable economic and fiscal developments.

Economic growth in Cyprus is projected to benefit from robust private consumption, rising service exports, and strong investment in the construction sector.

While the outlook is subject to downside risks, including escalating geopolitical tensions and global trade disputes, Cyprus remains less vulnerable than other EU countries due to its relatively small manufacturing sector.

Fiscal performance is expected to remain strong, with the European Commission predicting an average general government budget surplus of 2.7 per cent of GDP in 2025 and 2026.

This compares favourably with other eurozone nations and Cyprus’ own pre-pandemic fiscal results.

Moreover, Morningstar DBRS noted that improved fiscal outcomes stem not only from favourable cyclical conditions but also from structural enhancements in revenue collection.

These improvements help offset potential expenditure pressures from large-scale energy projects, the expansion of the rent-to-mortgage scheme, and increased defence spending.

Additionally, the improved financial health of domestic banks has strengthened Cyprus’ credit profile, with rising capital reserves enhancing banking sector resilience.

Key factors in the upgrade include enhancements in “Debt and Liquidity” and “Monetary Policy and Financial Stability.”

The rating agency also acknowledged Cyprus’ stable political environment and sound economic policies, highlighting that EU membership further reinforces the country’s institutional quality.

Potential future changes

Morningstar DBRS also mentioned that Cyprus’ credit rating could be further upgraded if sustained economic growth and strong fiscal performance lead to a continued substantial decline in the public debt ratio.

Indicators of increased economic resilience and rising labour productivity could also support a positive shift.

Conversely, the agency warned that the positive trend could revert to stable if expectations regarding debt reduction change significantly.

A downgrade could occur in the event of a major deterioration in public debt trajectory, potentially caused by prolonged low growth or rising fiscal pressures.

Additionally, large contingent liabilities, particularly from the domestic banking sector, could negatively impact Cyprus’ creditworthiness.

Government response

Cypriot Finance Minister Makis Keravnos welcomed the upgrade, describing it as “significant.”

In a written statement, he remarked that “the upgrade from DBRS confirms the prudent economic policies of the government, which are based on fiscal discipline and developmental practices, as well as the resilience and dynamism of the Cypriot economy amidst global challenges and uncertainties.”

He further stated that “the responsible economic policies pursued by Cyprus are positively evaluated by major international rating agencies, with which the country maintains contractual relationships, leading to continuous upgrades to the highest investment grade.”

Furthermore, Keravnos reaffirmed the government’s commitment to fiscal discipline and financial stability, stating that “the government will continue to implement its economic policies aimed at steady and sustainable growth“.

He also said these policies will be implemented “with a focus on initiatives that support citizens, particularly vulnerable groups, through targeted economic policies and reforms.”

Meanwhile, a statement from the Finance Ministry reiterated that “the government remains committed to supporting the economy responsibly and flexibly, addressing employment and public finance challenges while promoting economic plans that maximise available opportunities for sustained growth and further public debt reduction.”

Economic growth and fiscal developments

Justifying the upgrade, Morningstar DBRS noted that Cyprus maintained relatively strong economic growth in the past year, supported by both external and domestic demand.

Real GDP increased by 3.4 per cent in 2024, significantly outpacing the eurozone’s overall growth rate of 0.9 per cent. Growth was driven by increased service exports, particularly in financial services and intellectual property-related transactions.

Private consumption also grew strongly, albeit at a slowing pace, supported by real wage gains and rising employment levels, particularly among foreign labour.

The Central Bank of Cyprus (CBC) projects real GDP growth of 3.2 per cent in 2025 and 3.1 per cent in 2026, driven by strong domestic demand.

Private consumption is expected to benefit from further, though moderating, real wage growth and continued employment expansion.

On the fiscal front, Cyprus’ strong budgetary performance has bolstered its credit profile.

The general government surplus rose to 4.5 per cent of GDP in 2024 from 2.0 per cent in 2023.

Part of this increase stemmed from one-off factors, including a retroactive pension fund payment in 2023 amounting to 1.1 per cent of GDP.

Additionally, fiscal performance benefited from continued revenue growth, particularly in corporate income taxes and, to a lesser extent, household taxes.

Public debt as a share of GDP has followed a clear downward trajectory in recent years, driven by high fiscal surpluses and strong nominal GDP growth.

General government debt fell from 113.6 per cent of GDP in December 2020 to 69.7 per cent in September 2024.

Projections indicate that sustained surpluses and favourable debt dynamics will lead to further reductions, with government forecasts suggesting a decline to 64.1 per cent of GDP in 2025 and 58.8 per cent in 2026.

Political stability and institutional strength

Morningstar DBRS highlighted the stability of Cyprus’ political environment, noting that the election of president Nikos Christodoulides in February 2023 did not result in major policy changes, particularly regarding fiscal policy and reforms under Cyprus’ Recovery and Resilience Plan.

These reforms aim to enhance judicial and public sector efficiency, reduce corruption, and promote the green and digital transitions.

The agency also said that successful implementation of the plan will depend on the government’s ability to secure sufficient parliamentary support for necessary legislative measures.

While Cyprus’ ranking in global governance indicators, such as corruption control and the rule of law, has declined in recent years and now falls below the EU average, Morningstar DBRS considers EU membership a crucial factor in maintaining institutional quality.