Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Cyprus (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BBB/Stable Outlook; short-term local- and foreign-currency issuer ratings: S-2/Stable) on 30 May 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The Republic of Cyprus’s long-term BBB ratings are underpinned by the country’s strong growth potential with one of the highest growth rates in the euro area, a solid fiscal consolidation trajectory and commitment to structural reform. The Cypriot economy outperformed expectations in 2022, with growth of 5.6% and a budget surplus of 2.1% of GDP. This was thanks to a faster-than expected recovery in tourism and broad-based expansion across sectors, supporting tax revenue, coupled with a gradual phase out of fiscal support measures. The Cypriot government’s proven capacity to implement structural reforms, maintain fiscal discipline and address banking sector vulnerabilities is a key factor supporting its debt sustainability in the wake of the Covid-19 and energy crises. Since peaking in 2020, public debt decreased by 27pps of GDP, reaching 86.5% of GDP in 2022. Scope’s baseline projects debt to decline substantially to 56% of GDP by 2028, supported by strong fiscal performance, economic growth and the use of cash buffers to cover gross financing needs.

However, structural challenges remain and could impede the government’s efforts to stabilize debt levels. These include: i) a small, open and externally dependent economy; ii) lingering albeit improving vulnerabilities in the banking sector, as reflected in still elevated non-performing exposures; and iii) high sensitivity to shocks due to still large macro-economic imbalances, reflected in high levels of private and public debt, combined with a weak external position.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced.

The ratings could be upgraded if, individually or collectively: i) sustained fiscal consolidation is achieved, resulting in a material decline in public debt; ii) vulnerabilities in the banking sector ease further; and/or iii) resilience to external shocks is strengthened, for instance through the development of high value-added export sectors or lower energy import dependence.

Conversely, the ratings/Outlooks could be downgraded, if individually or collectively: i) the growth outlook deteriorates substantially; ii) the debt trajectory were to reverse, for instance due to fiscal loosening or weakened growth; and/or iii) banking sector fragilities re-emerge which lead to additional liabilities for the sovereign.

For the updated rating report accompanying this review, click here.

The methodology applicable for the reviewed Ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Thibault Vasse, Associate Director

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