Panayiotis Rougalas
Standard & Poor’s (S&P) upgrade of Cyprus is a major recognition for the country, although it did not come as a surprise, given the strong performance of the Cypriot economy. The upgrade also opens the door to further rating improvements in the private sector.
In recent years, Cyprus has managed to achieve some of the eurozone’s highest growth rates despite major geopolitical developments. The country has also recorded large primary surpluses and one of the fastest rates of debt reduction relative to GDP.
The improvement in Cyprus’ credit rating is not limited to the state and could also benefit the banking sector. Raising Cyprus’ sovereign rating from A- to A effectively sets a new reference point for the highest rating level that domestic banks can achieve. As a result, any further upgrade for the country could create more room for improvements in bank ratings. If Cypriot banks receive higher ratings, their financing costs could fall when they raise money from the markets, potentially creating more favourable borrowing conditions for their customers.
Significant benefits
The benefits of the upgrade by the agency that returned Cyprus to investment grade for the first time following its obligations under the bailout programme are both direct and indirect. Beyond creating room for potential upgrades for Cypriot banks, the move is also expected to reduce the Republic of Cyprus’ borrowing costs.
At the same time, the upgrade gives investors another reason to consider Cyprus and makes the country more attractive as an investment destination. Large companies assess the investment risk of each country and pay close attention to its credit rating. Some investors will not even consider countries that do not have an A rating.
The main points of the S&P assessment
According to the S&P report, economic growth is expected to continue unless there is a significant deterioration in the situation in the Middle East. Growth is expected to slow to 2.7% compared with recent years, but this would still be a high rate compared with other European countries. Fiscal surpluses are also expected to continue.
At the same time, S&P expects the significant reduction in public debt to continue, with public debt projected to fall to just above 30% by 2029.
The agency also pointed to the satisfactory level of economic governance and the Republic of Cyprus’ commitment to prudent fiscal policy.
In addition, it said the very positive situation in the labour market, together with continued private investment from both foreign and domestic sources, is expected to boost domestic demand and have positive effects on the economy.
Finally, the rating agency said the current account deficit is expected to remain close to 7% between 2027 and 2029. Despite its size, S&P considers the deficit manageable.
