Strong Fiscal Fundamentals and Robust Economic Growth
The international credit ratings agency Fitch has affirmed Cyprus’ long-term rating at A- with a stable outlook. This decision reflects the nation’s strong public finances, a significant reduction in debt levels, and steady economic growth. Officials at the finance ministry welcomed the move, describing it as a robust vote of confidence in the government’s prudent economic policies.
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Notable Budget Surpluses and Debt Reduction
Fitch highlights Cyprus’ high primary budget surplus, projected at 4.3% of GDP for 2024, alongside a dramatic drop in public debt from 73.6% of GDP in 2023 to 65.3% by year-end. The surplus soared to 5.6%, marking the highest level in nearly two decades, largely due to rising revenues and disciplined spending. The agency forecasts continuous improvement with debt falling further to 52.6% of GDP in 2026 and potentially nearing 45% by 2030, assuming current trends persist.
Economic Performance and Labor Market Strength
Cyprus’ economy is projected to grow at 3% for both 2025 and 2026, following a 3.4% expansion in 2024. A robust services sector and a healthy labor market are propelling this growth, with employment rising by 2% in 2024 and unemployment declining to 4.5%, close to record lows.
Market Vulnerabilities and External Challenges
Despite these positive developments, Fitch underscored persistent vulnerabilities, including a high current account deficit — estimated at around 7% of GDP over the coming years. This deficit, among the highest in the EU, is offset by sustained foreign direct investment (FDI) flowing into a diverse range of sectors. Additionally, while Cyprus’ banking system remains stable with a top-tier CET1 ratio of 24.5% and declining non-performing loans, long-term risks persist due to governance issues relative to other A-rated peers and exposure to regional geopolitical tensions.
Outlook and Policy Implications
Although Fitch’s model initially rated Cyprus at A, external risks necessitated a one-notch reduction. Future upgrades will hinge on continued debt reduction and narrowing the external deficit. Conversely, a downturn in public finances or a severe external shock could precipitate a downgrade. The finance ministry stated that the report is a testament to Cyprus’ steady economic trajectory, highlighting the ongoing commitment to responsible fiscal management as essential for bolstering both competitiveness and stability.
In conclusion, the agency’s assessment reinforces Cyprus’ sound economic fundamentals, while also flagging areas that require ongoing vigilance. As the government continues to implement strategic economic reforms, the outlook remains cautiously optimistic amid the broader global economic uncertainties.
