The confirmation of Cyprus’ credit rating by Standard & Poor’s at A- and the upgrade of the outlook to Positive from Stable, reflects the consistency and responsibility in our fiscal choices, President Nikos Christodoulides has said.
In a written statement on 15 November, the President noted that the confirmation of Cyprus’ credit rating by Standard & Poor’s at A- and the upgrade of the outlook to Positive from Stable, “reflects the consistency and responsibility in our fiscal choices”.
This assessment, he adds, “reflects the consistency and responsibility in our fiscal choices, the promotion of reforms and the emergence of Cyprus as a reliable center of quality investments with tangible benefits for our fellow citizens: reduced borrowing costs, enhanced entrepreneurship and new, well-paid jobs.”
He said that the strategic choice of a competitive, technologically driven, and outward-looking economic model is delivering results and further enhancing the country’s prospects.
Finance Minister Makis Keravnos also welcomed the latest S&P Global Ratings assessment, attributing the improved outlook to fiscal discipline, the resilience of the Cypriot economy and the continued reduction of public debt.
“I am once again in the very pleasant position of welcoming another important credit rating report for the Republic of Cyprus by Standard & Poor’s, through which the international agency not only confirms the credit rating of the Cypriot economy at the highest investment grade, ‘A-’, but also upgrades its outlook from stable to positive,” he said.
He expressed his satisfaction that Standard & Poor’s based its assessment on the strong resilience of the Cypriot economy, its positive fiscal and macroeconomic performance, and the ongoing reduction of public debt. This, he noted, “demonstrates the confidence that the major rating agencies with which the Republic of Cyprus maintains a contractual relationship show in the government’s economic policy.”
He added that the revision of the outlook to positive mainly reflects the potential for further upgrades of Cyprus’s investment-grade rating in future assessments, as continued fiscal consolidation and strong fiscal surpluses are expected to bring net public debt down to 35% of GDP by 2028.
“The consistent positive assessments of the credibility of the Cypriot economy by all major agencies in recent years reflect not only the creditworthiness of the Republic of Cyprus in international markets, but also the dynamism of the Cypriot economy in an environment of heightened geopolitical risks, as a result of the government’s sound and rational economic policies, based on fiscal discipline and growth-oriented practices,” the Minister stressed.
He concluded by emphasising that the government will continue to pursue an economic policy aimed at steady and sustainable growth, grounded in fiscal discipline and financial stability, while focusing on initiatives that support citizens — particularly vulnerable groups — through targeted economic measures.
S&P Global Ratings on 14 November 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’.
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&P said it could upgrade the sovereign if the external debt position continues to strengthen at a faster pace than projected, supported by sustained reductions in net external leverage.
A downgrade is possible if the small and open Cypriot economy is hit by an external shock, such as weaker activity among key trade partners or rising geopolitical tensions, resulting in adverse effects on growth, public finances and the banking sector.
Stronger external position and fiscal deleveraging
S&P said the outlook revision is mainly driven by expectations that Cyprus’ external debt position will strengthen beyond baseline forecasts, helped by continued public and private deleveraging and resilient services exports. Although Cyprus has posted average current account deficits of over 8% of GDP in the past five years, gross external debt excluding special-purpose entities (SPEs) has continued to fall.
The agency also noted Cyprus’ fiscal overperformance. Strong economic expansion and a robust labour market have boosted corporate and personal tax revenues as well as social security contributions, while expenditure has been relatively contained. This has allowed the government to generate surpluses and pay down debt. S&P expects fiscal surpluses to average 3.3% of GDP in 2025-2028, reducing net government debt to about 35% of GDP by 2028 from 56% in 2024 and almost 90% in 2019.
Economic performance and growth outlook
Cyprus’ strong economic momentum continued in early 2025, with S&P forecasting real growth of 3.3% for the full year. Recent years have seen booming tourism and a surge of ICT firms relocating to Cyprus, but S&P expects sectoral growth to moderate as tourism runs near capacity and ICT relocations slow. Domestic demand is set to become the main growth driver, supported by a healthy labour market, rising real incomes, and a substantial pipeline of private and public investments, including more than €500 million in remaining NGEU funds through 2026.
It is also noted that the economy has remained resilient to the effects of the Ukraine and Middle East conflicts, while Cyprus’ exposure to U.S. trade tensions is limited due to its narrow export links. However, weaker growth in key European trading partners could pose indirect risks.
Institutional strengths and energy Developments
S&P views Cyprus’ governance and institutional framework as comparatively strong, supported 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. The long-delayed LNG terminal at Vasilikos—now expected to become operational in the second half of 2026—should ease Cyprus’ very high energy costs. It is also noted that progress on the Great Sea Interconnector remains frozen due to disputes with Turkey, though the project has secured substantial EU funding. Gas exploration continues, with potential production from 2028 mainly destined for Egypt. Revenues could benefit public finances, but uncertainty means these flows are not yet in S&P’s baseline.
The agency also highlighted the political context, noting the election of Tufan Erhürman in the Turkish Cypriot leadership may open space for improved dialogue, though core issues remain unresolved.
Fiscal outlook and government debt
Cyprus posted a 4.1% budget surplus in 2024—its strongest on record—and preliminary data show 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 almost 30% over the same period.
S&P expects 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.
Government debt has continued to decline, falling below the Maastricht threshold of 60% of GDP for the first time since 2010. Interest payments amounted to just 2.9% of revenue in 2024. Large cash buffers of €3.9 billion (11% of GDP) have enabled the early repayment of past crisis-era borrowing.
External accounts and banking sector
Cyprus continues to post current account deficits—averaging 8.4% of GDP in 2021-2024—driven largely by a widening primary income deficit linked to foreign-owned firms. Goods and services balances remain in small surplus. Despite large headline FDI liabilities tied to SPEs, S&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&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&P expects domestic credit to grow 2.5% in 2025 following years of contraction.
Overall, S&P said Cyprus’ improved external and fiscal fundamentals, combined with resilient economic growth and strong institutional anchors, support the positive outlook.
(Source: CNA)
