The economic outlook for Cyprus is now positive, as Capital Intelligence Ratings has upgraded the long-term foreign currency rating to BBB- and highlighted the reduction in government debt, strong fiscal performance, and banking sector reforms contributing to this optimistic outlook. The nation’s proactive debt management strategy, high per capita GDP, and robust fiscal performance are key factors driving this positive assessment, signaling a promising future for Cyprus’s economic stability.
What is the current economic outlook for Cyprus according to Capital Intelligence Ratings?
Capital Intelligence Ratings has revised the economic outlook of Cyprus to positive from stable, maintaining its long-term foreign currency rating at BBB-. This reflects a reduction in government debt, a proactive debt management strategy, a resilient high per capita GDP economy, reforms in the banking sector, and robust fiscal performance.
Capital Intelligence Ratings Optimism
Capital Intelligence Ratings (CI Ratings) has recently provided a brighter perspective on the economic future of Cyprus. The agency adjusted the long-term foreign currency rating (LT FCR) outlook for the Republic of Cyprus from stable to positive. This change is underlined by the LT FCR and short-term FCR (ST FCR) being maintained at BBB- and A3, showing sustained confidence in the nation’s financial stability.
The optimism from CI Ratings comes from a notable reduction in the government’s debt, attributed to consistent primary fiscal surpluses and proactive debt management strategies. These efforts reflect a deliberate approach to reducing refinancing risks and building up cash buffers as a safeguard against short-term economic shocks and external vulnerabilities.
Debt Management and Economic Resilience
In a move demonstrating fiscal prudence, the Cypriot government has been actively managing its debt maturity profile. This strategic management has effectively decreased state contingent liabilities, particularly those originating from the banking sector. The rating agency highlighted these liabilities had significantly diminished over the recent years.
Additionally, the nation’s economic strength has been recognized, with a high per capita GDP and resilient economy even amidst challenging global financial conditions. The positive influence of EU and eurozone memberships, including access to financial support through mechanisms such as the Recovery and Resilience Facility (RRF), has also been emphasized.
Fiscal Performance and Debt Dynamics
CI Ratings noted the general government debt-to-GDP ratio’s decline to 77.3% in 2023 from 85.6% in 2022. This decrease comes as a result of a primary budget surplus that outpaced forecasts and the repayment of significant bond and loan amounts. Looking ahead, the public debt is expected to follow a favorable trend with the debt-to-GDP ratio projected to reduce further to 66.2% by 2025.
The government’s fiscal performance continues to be robust, and it is anticipated that budget surpluses will be maintained for the years 2024-25, averaging at 3.1% of GDP. This fiscal resilience has been central to the country’s economic stability.
Banking Sector Strength and Economic Growth
Reforms within the banking sector have been a cornerstone of Cyprus’s economic recovery. The Central Bank of Cyprus (CBC) reported a decrease in non-performing loan (NPL) ratios among credit institutions, a sign of strengthening financial health. Alongside this, there has been an increase in cumulative provisions, offering a more secure buffer against potential future loan defaults.
The capital adequacy of banks has also shown to be healthy, with the CET-1 ratio averaging at 21.4% at the end of September 2023. These financial safeguards are crucial for supporting the ongoing reduction in the banking sector’s leverage and ensuring its stability.
In terms of economic growth, forecasts predict an average real GDP increase of 2.6% for 2024-25, buoyed by improved domestic demand and investments. The high GDP per capita, standing at €32,097 in 2023, is another factor that bolsters the nation’s creditworthiness.
External Debt and Current Account Deficit
The current account deficit is expected to have risen to 10.1% of GDP in 2023. However, external debt, excluding special purpose entities (SPEs), has seen a decrease, signaling another positive trend. The Cypriot government’s thorough structural reforms, revenue mobilization, and swift resolution of legacy NPLs could potentially lead to an upgrade in rating beyond the current positive outlook.
Future Perspectives
While CI Ratings paints a generally optimistic picture for the Cypriot economy, it also acknowledges the potential risks. Increased expenditures on subsidies, social welfare, and public sector wages, as well as costs associated with the national healthcare system, could pose threats to fiscal discipline. Nonetheless, the agency’s current assessment suggests that high-risk premiums and the eurozone’s strict monetary policy are manageable, considering the reduction in general government debt and the high proportion of debt fixed at interest rates.
Overall, the Republic of Cyprus’s economic and fiscal outlook seems to be on an upward trajectory, demonstrating resilience and cautious optimism for the future.
What is the current economic outlook for Cyprus according to Capital Intelligence Ratings?
Capital Intelligence Ratings has revised the economic outlook of Cyprus to positive from stable, maintaining its long-term foreign currency rating at BBB-. This reflects a reduction in government debt, a proactive debt management strategy, a resilient high per capita GDP economy, reforms in the banking sector, and robust fiscal performance.
What factors contributed to the positive assessment of Cyprus’s economic stability by Capital Intelligence Ratings?
The positive assessment by Capital Intelligence Ratings was influenced by factors such as a reduction in government debt, proactive debt management strategies, high per capita GDP, robust fiscal performance, reforms in the banking sector, and a resilient economy despite global financial challenges.
How has the Cypriot government managed its debt profile to ensure economic resilience?
The Cypriot government has actively managed its debt maturity profile, reducing state contingent liabilities, particularly from the banking sector. This strategic approach has decreased debt levels, enhanced fiscal prudence, and built cash buffers to safeguard against economic shocks and external vulnerabilities.
What are the key projections for the future of Cyprus’s economy, particularly in terms of fiscal performance, banking sector reforms, and economic growth?
Projections for Cyprus’s economy include a further reduction in the debt-to-GDP ratio, sustained budget surpluses, strengthened banking sector through reduced NPL ratios and increased provisions, and an average real GDP growth of 2.6% for 2024-25. These factors contribute to a promising future for Cyprus’s economic stability and growth.
