Moody’s has upgraded the Government of Cyprus long-term issuer and senior unsecured ratings by two notches from Baa2 to A3, returning to investment grade for the first time in 13 years.
This means Cyprus is rated as upper-medium grade and with a low credit risk, while the outlook has also improved from ‘positive’ to ‘stable’.
Three administrations have tackled a financial sector meltdown and banking crisis since 2011 that required a €7 bln bailout from the European Union, the European Central Bank and the International Monetary Fund.
An overexposure to toxic Greek government bonds and greed by bankers resulted in a painful rescue of the Bank of Cyprus by its depositors and shareholders, Hellenic Bank sought new investors, while Laiki Popular Bank collapsed, as did the Cooperative Central Bank.
The Finance Ministry said in a statement on Saturday that, “the double upgrade reflects the substantial improvement in fiscal and public debt indicators, which according to the rating agency are expected to remain stable.
“The government will continue to implement a disciplined policy so that the upward trend in credit ratings continues unhindered, ensuring growth and employment while maintaining sound public finances.”
President Nikos Christodoulides said that, “the new upgrade paves the way for significant prospects, enhancing efforts to attract quality investments, that contribute to creating new jobs.”
The rating agency also upgraded the country’s senior unsecured medium-term note (MTN) programme ratings to (P)A3 from (P)Baa2. The commercial paper rating and the other short-term rating have been affirmed at P-2 and at (P)P-2, respectively.
Moody’s said the two-notch upgrade “reflects a material improvement in fiscal and debt metrics that we expect to be sustained. Cyprus has significantly reduced its government debt ratio since its peak in 2020, ranking among the countries with the largest debt ratio reductions globally.
“We expect that the debt ratio will continue to decline over the medium term, with debt affordability metrics remaining favorable. Additionally, the medium-term economic outlook is solid, driven by the steady expansion of high-productivity services sectors supported by headquartering of companies, net immigration, significant foreign direct investments (FDIs), as well as reforms and investments related to Cyprus’ National Recovery and Resilience Plan (NRRP).”
Risks and prospects
Moody’s added that the stable outlook reflects a balance of risks related to economic, fiscal and debt prospects.
“We expect that banking sector risks will remain contained due to the material strengthening of the credit profiles of Cypriot banks in recent years and the continuation of banking sector deleveraging.”
Concurrently, Cyprus’ local and foreign currency country ceilings have been raised by a notch to Aaa from Aa2.
The rating agency said Cyprus’ fiscal and debt metrics have significantly improved in recent years.
“Adherence to a prudent fiscal policy stance that limits expenditures, coupled with robust public revenue growth, has led to fiscal surpluses in 2022-23. We forecast continued, though gradually diminishing, fiscal surpluses for 2024 to 2028.
“Fiscal surpluses, strong nominal GDP growth and a reduction of the sizable cash buffer, which was accumulated at very low funding costs at the peak of the pandemic in 2020, led to a marked reduction in the general government debt ratio to 73.6% of GDP in 2023 from 113.6% of GDP in 2020. Compared to 2019, Cyprus’ debt-to-GDP reduction has been one of the most substantial globally.
“We forecast that the debt ratio will continue to decline, reaching below 60% of GDP in 2025 and further decreasing to below 50% in 2027.
Moody’s expects an average real GDP growth rate of 3.2% from 2024 to 2028 driven by continued growth in the services sectors, information and communication technology (ICT), finance and insurance.
“We expect ongoing net immigration supported by headquartering of companies in Cyprus, particularly from Ukraine, Israel and the Middle East, as well as the relocation of employees and their families.”
However, Moody’ warned that downside risks encompass an outflow of highly skilled foreign workers resulting in more adverse demographic trends, cancellation or postponement of large FDI projects, a rise in geopolitical risks.
“Higher than expected growth in the public wage bill, potential further changes to cost of living allowance and materialisation of spending pressures in healthcare could result in weaker than forecast fiscal and debt metrics.”
The rating agency concluded that although environmental, social, governance (ESG) considerations do not have a material impact on the credit rating, obstacles include the country’s exposure to chronic water shortages, physical climate risks, a moderate exposure to negative demographic trends and an ageing population.
Commenting on the two-notch ratings upgrade, Finance Minister Makis Keravnos said that, “the double upgrade by Moody’s, as well as the previous upgrades of the last year by all rating agencies, is the result of the prudent economic and fiscal policy implemented by the government.
“This policy allows us to create conditions of security in the economy for citizens and entrepreneurs, and to implement a social policy that supports and relieves vulnerable groups and the small and middle class.”
Central Bank Governor Christodoulos Patsalides added that this upgrade takes on even greater value in the current context of increased geopolitical risks and uncertainty.
“Cyprus, as a small and open economy, must ensure the further expansion of its productive base, the improvement of its competitiveness, and the implementation of responsible public economic policies,” he said.
