Capital Intelligence Ratings (CI Ratings or CI) has affirmed the Long-Term Foreign Currency Rating (LT FCR) of the Republic of Cyprus at ‘BBB+’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term FCR (ST FCR) at ‘A2’. The Outlook for the ratings remains Stable.
CI Ratings said in a press release late on 19 September that "the ratings reflect the sustained strengthening of the public finances, marked by a continued decline in short- to medium-term fiscal risks." It also noted that "this improvement is underpinned by persistent general government budget surpluses, low gross financing needs, and a steady reduction in government debt."
"Active management of the debt maturity profile has helped mitigate refinancing risks, while a sizeable cash buffer offers a strong safeguard against near-term shocks and external adversities. The ratings also factor in the gradual decline in contingent liabilities linked to the banking sector, supported by a substantial reduction in macro-financial imbalances and the improving resilience of Cypriot banks," the press release said.
It further added that "the ratings remain supported by Cyprus’s robust and resilient economic growth – among the strongest in the euro area – together with high GDP per capita, strong inflows of foreign direct investment, and the institutional and financial benefits of EU and euro area membership, including access to Recovery and Resilience Facility (RRF) resources."
CI Ratings pointed out that the ratings are constrained by structural challenges. These include large current account deficits, elevated external debt, very high external financing needs, and heightened geopolitical risks." "Further constraints stem from the still-substantial stock of NPLs managed by credit-acquiring companies (CACs), the slow progress on structural reforms to address labour market rigidities, rising cost of living and productivity weaknesses, as well as medium- to long-term fiscal pressures arising from the General Healthcare System (GHS) and an ageing population," it noted.
"The public finances remain strong. According to Ministry of Finance (MoF) data, the general government debt-to-GDP ratio fell to 61.7% in July 2025, from 65.1% in December 2024. Debt dynamics have been supported by a very strong general government budget surplus of 2.4% of GDP in the first seven months of 2025 (compared with 2.7% in the same period of 2024) alongside robust economic activity. Central government debt, which also includes liabilities of the social security fund, declined to 98.0% of GDP, from 101.6% in December 2024," the press release added.
"Looking ahead, CI expects general government debt to fall further to 61.1% of GDP in 2025 and 56.8% in 2026, which would be the first time since 2010 that the debt ratio is below the Maastricht Treaty threshold of 60.0%. Debt maturities – estimated at EUR1.8bn (5.1% of GDP) in 2025 and EUR2.3bn (5.7% of GDP) in 2026 – are manageable and pose no refinancing challenges. Moreover, CI expects the general government budget position to register an average surplus of 2.5% of GDP in 2025-27," CI Ratings said.
It also noted that "short-term refinancing risks are diminishing, thanks to sound fiscal management, a favourable maturity structure, and low gross financing needs (projected at 3.1% of GDP in 2025). The government maintains sizeable cash buffers equivalent to around 11% of GDP, sufficient to cover roughly 300% of gross financing needs for at least the next 12 months," it added.
"The outlook for public finances is broadly balanced. Risks could arise if fiscal discipline weakens, particularly if rising expenditure on subsidies, social welfare and public wages outpaces revenue growth. Downside risks to GDP could also dampen tax receipts," CI Ratings pointed out, adding that "medium-term fiscal pressures may emerge from large investment projects, notably the delayed liquefied natural gas terminal (with potential budgetary costs of up to 1% of GDP) and the Great Sea Interconnector, which could temporarily weigh on fiscal balances."
"Additional fiscal risks stem from contingent liabilities, including state-guaranteed debt of public entities, rising GHS costs, and ongoing legal disputes. According to the MoF’s fiscal risk report, liabilities of public entities amounted to 8.4% of GDP in 2023, with 10.9% of this debt classified as non-performing, concentrated in entities reliant on subsidies and with high operating costs. Explicit public guarantees declined to an estimated 4.4% of GDP in 2024, and are mainly linked to the Electricity Authority of Cyprus and the Cyprus Asset Management Company (KEDIPES)," the press release said.
It further added that "the GHS Fund posted a modest surplus of EUR113mn (0.3% of GDP) in 2024, and accumulated reserves of EUR707mn (equivalent to 4.6 months of payments). However, rising expenditures due to demographic factors are expected to adversely affect its financial performance in the short to medium term."
"Risks from the banking system continue to recede. The sector’s size declined to 187.0% of GDP in July 2025, from 195.4% in 2024, while capitalisation remains strong. According to the Central Bank of Cyprus, the NPL ratio fell to 5.9% of total loans in May 2025 (from 6.2% in December 2024), with provisioning coverage increasing marginally to 61.0% (from 59.9%)," CI Ratings pointed out. "Restructured loans also decreased to 5.0% of total loans in July 2025, compared with 5.3% in 2024 and 11.2% in 2022. Banks remain well-capitalised, with an average CET1 ratio of 26.3% as of June 2025 – the highest in the EU. Liquidity and profitability ratios were also sound," it noted.
(Source: CNA)
