Credit rating agency S&P has upgraded the outlook of Cyprus’ economy from “stable” to “positive”, citing a “faster than expected” improvement in external debt ratios.

The island’s credit rating remains unchanged at “A-/A-2” for both long-term and short-term debt, with S&P saying the new, “positive” outlook “reflects the likelihood that Cyprus’ external position will outperform current projections over the next two years as external debt is de-escalated more rapidly”.

“An upgrade is possible if the reduction in net external leverage continues at a stronger pace than estimated,” it said, adding that despite Cyprus’ “persistent” current account deficit, the island has net inflows of foreign direct investment, which in turn allows for a “gradual reduction of external debt”.

It did, however, warn that any “potential deterioration in the external environment”, including reduced financial activity among Cyprus’ trading partners or “increased geopolitical tensions” could “put pressure on the economy, public finances, and the banking system”.

It went on to say that the upgrading of Cyprus’ economy’s outlook to “positive” came about “mainly [due] to the expectation of a further strengthening of Cyprus’ external position, aided by ongoing public and private sector deleveraging and resilient services exports”.

“Despite persistent deficits of over eight per cent of [gross domestic product] over the past five years, gross external debt continues to decline,” it said, before describing Cyprus’ fiscal performance as “impressive”, and also hailing the island’s “strong economic activity and high employment [rate]”.

These two factors, it added, have “boosted tax revenues and social security contributions”, which, alongside “controlled” public spending have “led to continued surpluses and a further reduction in public debt”.

With this in mind, it said forecasts and average surplus of 3.3 per cent of GDP between 2025 and 2028, with net debt set to fall to 35 per cent of GDP in 2028, compared to 56 per cent last year and 90 per cent in 2019.

On the matter of growth, it said that “strong economic momentum” continued into the early part of this year, and that it thus forecasts a growth rate of 3.3 per cent for this year.

“Following a strong rise in tourism and the relocation of technology companies, growth is expected to be more driven by domestic demand, rising real incomes, and private and public investment,” it said.

It added that Cyprus’ economy has “proven resilient to the effects of the conflicts in Ukraine and in the Middle East”, and that its “exposure to trade tensions” between the United States and China in recent months “is limited to small export ties”.

However, it did note that “the slowdown in Europe” in terms of growth “could create indirect risks”.

President Nikos Christodoulides hailed the outlook’s upgrade, saying it “marks our country’s entry into a path of enhanced momentum” and that it “reflects the consistency and responsibility of our fiscal choices”.

He added that Cyprus has now emerged as “a reliable centre of quality investments with tangible investments for people”, which, he said, are “reduced borrowing costs, the strengthening of entrepreneurship, and new, well-paid jobs”.

“The strategic choice for a competitive, technologically driven, and open and outward-looking economic model brings results and further strengthens our country’s prospects,” he said.

Finance Minister Makis Keravnos, meanwhile, said the upgrade “demonstrates the confidence shown in the government’s economic policy by the major rating agencies”.

“The continuous positive assessments of the Cypriot economy’s credibility by all major agencies in recent years reflect not only the creditworthiness of the Republic of Cyprus, in international markets, but also the dynamic of the Cypriot economy in an environment with increased geopolitical risks,” he said.

He added that the government will “continue to implement its economic policy which is leading to continuous stable and sustainable growth, guided by fiscal discipline and financial sustainability, focusing on important initiatives which offer support to people and especially to underprivileged social classes, through sensitive economic policies”.