Morningstar DBRS has confirmed the Cyprus long-term foreign and local currency – issuer ratings at BBB (high) and changed the trend on the long-term ratings from ‘stable’ to ‘positive’, mainly because it believes “public debt metrics are likely to continue to improve”.
The rating agency also confirmed the Cyprus short-term foreign and local currency – issuer ratings at R-1 (low), maintaining the trend on all short-term ratings at ‘stable’.
The rationale behind the trend improvement is that the general government debt-to-GDP ratio decreased from 99.3% in 2021 to 77.4% in 2023, while the European Commission forecasts general government debt to decline further to 65.4% of GDP in 2025 on the back of strong economic growth and fiscal surpluses.
“Economic growth is likely to continue to benefit from robust private consumption, rising service exports and strong construction investment over the next few years,” Morningstar DBRS said.
The EC forecasts real GDP in Cyprus to grow by an average of 2.9% in 2024 and 2025, compared to a growth rate of 1.1% for the Euro Area.
“Favourable growth and employment developments, in turn, are projected to bolster tax revenues and social security contributions. Strong revenue growth has been a key driver of fiscal surpluses in recent years.”
During the first seven months of 2024, general government revenues grew by a large 14.2% year-on-year basis, driven by higher income taxes and social contributions which clearly exceeded the 9.4% increase in public spending.
“Government accounts are likely to continue to benefit from strong, albeit decelerating, revenue growth which will offset moderate spending pressures arising from rising public wages, ageing-related expenditure and the roll-out of the mortgage-to-rent scheme,” the rating agency commented.
The government’s stability programme from April 2024 forecasts the general government budget surplus at 2.9% of GDP in 2024 and at 2.8% in 2025.
Cyprus’ BBB (high) ratings are supported by a stable political environment, the government’s sound fiscal and economic policies in recent years, and a moderate interest burden.
“Athough governance indicators have weakened over the past years, Morningstar DBRS continues to view the country’s EU membership as an important anchor for institutional quality. On the other hand, the credit ratings of Cyprus continue to be constrained by the small size of its service-driven economy, which renders it vulnerable to external shocks.
“Cyprus also faces significant challenges due to a legacy stock of NPLs in the banking sector and the economy’s still comparatively low level of labour productivity,” the rating agency concluded.
