Nicosia: S and P Global Ratings revised the outlook on Cyprus to positive from stable, citing faster-than-expected improvement in the country’s external debt. The agency simultaneously affirmed the sovereign’s long-term and short-term local- and foreign-currency credit ratings at ‘A-/A-2’.
According to Cyprus News Agency, the positive outlook reflects the potential for Cyprus’ external performance to exceed current forecasts over the next two years, driven by a quicker decline in external leverage. S and P indicated that an upgrade could be on the horizon if the external debt position continues to strengthen at a rapid pace, supported by sustained reductions in net external leverage. However, a downgrade remains a possibility if the small and open Cypriot economy encounters an external shock, such as weaker activity among key trade partners or rising geopolitical tensions, adversely impacting growth, public finances, and the banking sector.
S and P reported that the outlook revision is primarily fueled by expectations that Cyprus’ external debt position will outperform baseline forecasts, aided by ongoing public and private deleveraging and resilient services exports. Despite Cyprus having posted average current account deficits exceeding 8% of GDP over the past five years, gross external debt excluding special-purpose entities (SPEs) has continued to decline. The agency also highlighted Cyprus’ fiscal overachievement, driven by strong economic expansion and a robust labor market, which have boosted tax revenues and social security contributions while keeping expenditure relatively contained. This fiscal discipline has enabled the government to generate surpluses and reduce debt. S and P projects fiscal surpluses to average 3.3% of GDP from 2025 to 2028, reducing net government debt to approximately 35% of GDP by 2028 from 56% in 2024 and nearly 90% in 2019.
S and P forecasts that Cyprus’ robust economic momentum will continue in early 2025, with expected real growth of 3.3% for the entire year. While recent years have seen booming tourism and an influx of ICT firms relocating to Cyprus, S and P anticipates sectoral growth to moderate as tourism nears capacity and ICT relocations slow. Domestic demand is expected to become the primary growth driver, supported by a healthy labor market, rising real incomes, and a substantial pipeline of private and public investments, including over £500 million in remaining NGEU funds through 2026. The economy has shown resilience to the effects of the Ukraine and Middle East conflicts, and Cyprus’ limited exposure to U.S. trade tensions due to narrow export links. However, weaker growth among key European trading partners could pose indirect risks.
S and P regards Cyprus’ governance and institutional framework as relatively strong, buoyed by prudent fiscal management and a stable consensus-driven policy environment. Reforms under the EU Recovery and Resilience Plan are set to continue. Enhancing energy security remains a government priority, with the long-delayed LNG terminal at Vasilikos now expected to become operational in the latter half of 2026, potentially easing Cyprus’ high energy costs. Progress on the Great Sea Interconnector remains stalled due to disputes with Turkey, though the project has secured substantial EU funding. Gas exploration is ongoing, with potential production from 2028 primarily destined for Egypt, which could benefit public finances, though uncertainty means these flows are not yet factored into S and P’s baseline. The agency also noted the political context, with the election of Tufan Erhrman in the Turkish Cypriot leadership potentially opening space for improved dialogue, though core issues remain unresolved.
In 2024, Cyprus posted a 4.1% budget surplus, marking its strongest on record, with preliminary data indicating only a slight easing in 2025. Revenue grew more than 6% in the first nine months, supported by foreign company relocations, employment gains, and a 7.3% rise in social security contributions. Public investment increased by nearly 30% over the same period. S and P anticipates surpluses to average 3.3% of GDP through 2028, helping rebuild buffers against future shocks. However, long-term fiscal challenges persist, including an aging population, climate risks, and the sizable public-sector wage bill. The CoLA system, which indexes public wages to two-thirds of inflation, exposes Cyprus to higher inflation risks compared with peers.
Cyprus continues to post current account deficits, averaging 8.4% of GDP from 2021 to 2024, driven largely by a widening primary income deficit linked to foreign-owned firms. Despite large headline FDI liabilities tied to SPEs, S and P excludes these entities, which have little connection to the domestic economy, from its external analysis. Inflation fell sharply to 0.3% in October due to declines in energy, goods, and food prices and a stronger euro. S and P expects inflation to settle slightly above 2% in 2026-2028, above the ECB target. The banking sector continues to strengthen, with NPL ratios declining to 5.5% (or 2.9% under the EBA methodology). Banks remain profitable, liquid, and well-capitalized, though nonperforming assets held by credit-acquiring companies remain high. S and P expects domestic credit to grow 2.5% in 2025 following years of contraction.
Overall, S and P stated that Cyprus’ improved external and fiscal fundamentals, combined with resilient economic growth and strong institutional anchors, support the positive outlook.