DBRS upgrades Cypriot economy

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DBRS Ratings upgraded the long-term ratings of Cyprus to BBB (high), from BBB, with a stable outlook, giving a rating one level higher (third level) than the remaining three major credit rating agencies, Moody’s, Fitch and Standard and Poor’s.

At the same time, the agency upgraded Cyprus’ Short-Term Foreign and Local Currency – Issuer Ratings from R-2 (high) to R-1 (low). The trends on all ratings remain Stable.

According to DBRS, the upgrade is driven by the recent decline in government debt and DBRS Morningstar’s expectation that public debt metrics will improve over the next years.

General government gross debt decreased to 86.5% of GDP in 2022 from 101.2% in 2021 and is projected to decline further to 67.3% in 2025, driven by robust economic growth and large primary surpluses.

“While moderating, economic growth is likely to remain among the strongest in the euro area.”

DBRS added that real GDP is forecast to expand by 2.4% in 2023 and 2.7% in 2024, underpinned by a further increase in tourist arrivals, a continued expansion of information and communications technology (ICT) industries and robust domestic demand.

It believes the new government will continue to pursue prudent fiscal policies.

“The government’s stability programme targets primary budget surpluses of 3.2% of GDP in 2023 and 3.7% in 2024.

“Downside risks from global financial fragility, which had risen at the time of our last review in March 2023, have subsided in recent months.

“While a materialisation of contingent liabilities from the banking sector remains an important downside risk, DBRS Morningstar currently does not expect a lasting reversal of the downward trajectory in debt metrics over the next years.

The agency said improvements in “Debt and Liquidity” and “Fiscal Management and Policy” building blocks are the key factors for the upgrades.

“Cyprus’ BBB (high) ratings and the Stable Trend are supported by a stable political environment, the government’s sound fiscal and economic policies in recent years, and a favourable government debt profile.

“Although governance indicators have weakened over the past years, DBRS Morningstar continues to view the country’s EU membership as an important anchor for institutional quality.

“On the other hand, Cyprus also faces significant challenges due to a still high stock of legacy NPLs in the banking sector, and the economy’s still comparatively low level of labour productivity.

It warned the ratings of Cyprus continue to be constrained by the small size of its service-driven economy, which renders it vulnerable to external shocks.