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Last Friday, Moody’s delivered a major endorsement of Cyprus’ economic progress, upgrading its credit rating by two notches, from Baa2 to A3, with a stable outlook, according to a report by Panayiotis Rougalas. This marks the first time since 2011 that Cyprus has earned an "A" rating from any major agency, a milestone reflecting its significant financial turnaround.
Why the Upgrade?
Moody’s cited several factors for the double upgrade:
- Improved Fiscal Performance: Cyprus has consistently achieved large primary budget surpluses.
- Debt Reduction: The country has significantly lowered its debt-to-GDP ratio, now among the fastest reductions globally.
- Stable Growth Rates: Cyprus boasts one of the highest growth forecasts in the Eurozone, projected at 3.7% for 2024.
This recognition from Moody’s—a stringent credit agency—comes just a month after Scope Ratings also placed Cyprus in the "A" category.
From Crisis to Confidence
Cyprus only returned to investment-grade status in 2018, following more than seven years in the "junk" category due to its financial crisis. Back then, the economy was plagued by issues like high levels of non-performing loans in banks. Today, the landscape has shifted dramatically:
- Zero Non-Performing Loans: Banks have cleaned up their balance sheets.
- Surpluses and Low Unemployment: These factors contribute to a healthier economy.
- Debt Ratios Close to EU Standards: Debt management aligns with new European benchmarks.
However, challenges remain. The government must manage public sector payroll costs to maintain its fiscal discipline.
What It Means for Cyprus
This upgrade is more than just symbolic. It has real-world implications:
1. Lower Borrowing Costs:
- The upgrade has already led to reduced interest rate spreads between Cypriot and German bonds, dropping from 200 basis points two years ago to just 70.
- This allows the government to borrow at lower rates, even amid rising global interest rates.
2. Attracting Investors:
- The improved rating boosts Cyprus’ credibility among foreign investors.
- Institutional investors, who typically focus on highly rated countries, may now see Cyprus as a viable option, potentially driving more foreign investment, job creation, and economic growth.
3. Benefits for Banks and Businesses:
- Banks, which are typically rated below their sovereign, may also see upgrades.
- Lower borrowing costs for banks could trickle down to businesses and consumers.
- Increased investor interest in Cypriot bonds and bank-issued bonds is already evident.
What’s Next?
With Moody’s leading the charge, expectations are high for upcoming reviews from Fitch and Standard & Poor’s (S&P) in December. Both agencies currently rate Cyprus at BBB+ with a positive outlook. If these agencies follow suit, Cyprus could move closer to securing a top-tier credit rating.
Moody’s report praised Cyprus’ achievements in reducing its public debt ratio from its 2020 peak, placing it among global leaders in debt reduction. This, coupled with strong economic fundamentals, positions Cyprus as a growing force in the European investment landscape.
A Step Toward Greater Stability
The upgrade signals growing international confidence in Cyprus' ability to manage its economy and weather global challenges. While hurdles remain, the country is well on its way to solidifying its reputation as a stable and attractive destination for investors.
