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Fitch Upgrades Cyprus’s Credit Rating to ‘A-‘ from ‘BBB+’

by THEFUTURE.TEAM

December 9, 2024

Fitch Ratings has upgraded Cyprus’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘BBB+’ to ‘A-‘, citing significant progress in debt reduction, robust fiscal performance, and strong economic growth. The upgrade reflects a series of key rating drivers that underscore the country’s financial stability and growth prospects.

Sharp Decline in Debt-to-GDP Ratio

A standout factor in the upgrade is Cyprus’s remarkable reduction in its debt-to-GDP ratio. Fitch highlighted that Cyprus has achieved “one of the sharpest declines in public debt/GDP among Fitch-rated sovereigns in recent years.” Public debt is projected to fall from a peak of 113.5% in 2020 to 65.5% in 2024, with further reductions to 60% in 2025 and 55.1% in 2026. This trend would position Cyprus well below the current eurozone average of 89% and in line with the ‘A’-median ratio.

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Driving this debt reduction is a combination of factors, including high primary fiscal surpluses, sustained nominal GDP growth, and stable interest rate costs. Fitch forecasts an average primary surplus of 4.8% of GDP for the period 2024-2026, with the general government surplus expected to reach 3.9% of GDP in 2024.

Consistent Fiscal Discipline

Fitch acknowledged Cyprus’s consistent outperformance in fiscal results, which have regularly exceeded prior forecasts. Revenue growth, fuelled by strong employment gains and enhanced tax collection, has been a key contributor. Fitch projects a gradual decline in fiscal surpluses, averaging 2.9% in 2025-2026, but this still surpasses the projected ‘A’ median deficit of 2.7%.

Another crucial factor is Cyprus’s commitment to prudent fiscal policies, with support from across the political spectrum. This commitment includes a focus on debt reduction, increased revenue-raising capacity, and the maintenance of substantial cash reserves, which are expected to average 12% of GDP over the forecast period. Efforts to address long-term structural issues, such as financing the social security system, could further mitigate future fiscal risks.

Solid Economic Growth Outlook

Cyprus’s economic outlook remains positive, with Fitch forecasting GDP growth of 3.8% in 2024 and an average of 3.1% over the forecast period. Growth will be driven by high-performing sectors, notably information and communication technology (ICT) and financial services, which are known for their high productivity.

Unemployment is also on a steady downward trajectory. Fitch expects the unemployment rate to drop to 4.6% by 2026, a sharp decline from its peak of 16.1% in 2014.

Banking Sector Resilience

Cyprus’s banking sector has continued to strengthen, with Fitch highlighting improvements in solvency, liquidity, and profitability. Benefiting from higher interest rates and a favourable macroeconomic environment, banks have seen a reduction in non-performing loans (NPLs) — now at 7% as of the first half of 2024, down from 7.9% at the end of 2023. While still above the EU average, the drop was achieved organically rather than through asset sales, signalling long-term financial stability.

Fitch noted that improvements in the banking sector have reduced risks to macroeconomic stability and lowered the likelihood of contingent liabilities for the government. However, some legacy challenges within the sector remain and will need to be addressed in the medium term.

What the Upgrade Means for Cyprus

The Fitch upgrade to ‘A-‘ reflects growing international confidence in Cyprus’s fiscal and economic outlook. The country’s ability to reduce debt, maintain strong fiscal surpluses, and enhance banking sector stability all contributed to the rating uplift. This enhanced rating positions Cyprus more favourably in global financial markets, potentially reducing borrowing costs and attracting further investment.

As Cyprus continues to make progress on its economic and fiscal targets, it is well-placed to sustain its role as a regional financial hub, offering strong growth prospects and financial stability for investors and stakeholders alike.

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EU Adopts New Package Travel Rules With 14-Day Refund Requirement

The Council of the European Union adopted updated rules on package travel, introducing stricter requirements for refunds, transparency and consumer protection across member states. Updated provisions revise the existing directive and define obligations for travel providers offering bundled services such as flights, accommodation and transfers.

Clarifying The Package Travel Directive

The updated directive clarifies the definition of package travel and excludes certain linked travel arrangements from its scope. Coverage applies to services sold as a single product, including combinations of transport, accommodation and additional services. This revision standardizes how travel products are classified and clarifies rights and obligations for both providers and consumers at the point of purchase.

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Enhancing Transparency And Consumer Rights

New rules require providers to disclose key information before and during travel, including payment terms, visa requirements, accessibility conditions and cancellation policies. These disclosures aim to reduce disputes and improve consumer awareness. Defined refund timelines include a 14-day period for cancellations due to extraordinary circumstances and up to six months in cases of organiser insolvency. The measures address gaps identified in earlier versions of the directive.

Ensuring Accountability And Trust In Travel Services

Organisers must implement complaint-handling systems and provide clear information on insolvency protection under the updated framework. These provisions aim to improve accountability across the travel sector. Previous disruptions, including the collapse of Thomas Cook and travel restrictions during COVID-19, exposed weaknesses in refund processes and consumer protection. Updated rules respond to those issues.

Implications For Cyprus And The Broader Industry

Tourism accounts for approximately 14% of Cyprus’s GDP, with package travel playing a central role in visitor flows. Major operators such as TUI and Jet2 provide structured travel offerings that support demand. Such operators contribute to revenue stability and help extend the tourism season by securing transport and accommodation in advance. Greater regulatory clarity may support continued sector growth.

A Model For Future Consumer Protection

Clearer rules on vouchers, refunds and insolvency protection now apply across the European Union. These measures aim to reduce consumer risk in cross-border travel. Implementation across member states will determine the impact on both consumers and travel providers. The framework may influence future regulatory approaches in the sector.