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 Outlook) on 3 May 2024.

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

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

Cyprus’ long-term credit ratings of BBB+ are underpinned by: i) the country’s solid economic fundamentals and strong growth potential with one of the highest growth rates in the euro area; ii) a solid fiscal consolidation trajectory and commitment to structural reform; and iii) sustained improvements in the financial sector.

Cyprus’ ratings are challenged by: 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 large macro-economic imbalances, reflected in high levels of private and public debt, combined with a weak external position.

Domestic economic activity should remain robust with a projected real GDP growth rate of 2.8% in 2024, against 2.5% in 2023. The recovery following the cost-of-living-crisis is expected to be driven by the decline in inflation to around 2%, stronger private demand based on improved purchasing power and less restrictive funding conditions, and the EU Recovery and Resilience Facility. In 2025, real GDP growth is projected to stabilise at 3.0%, in line with the country’s growth potential. The labour market should remain resilient, with the unemployment rate expected to average 6% this year, which is slightly above the pre-banking crisis average of 4.5% but well below the peak of 16% in 2014.

Fiscal performance is expected to remain robust with a primary surplus projected at more than 3% of GDP on average between 2024 and 2029, among the highest across EU countries. Cyprus’ interest burden is projected to stabilise around 1.4% of GDP over the period as the rise in net interest payments is balanced by a steady deleveraging based on sustained primary surpluses and a robust growth momentum. Public debt is expected to remain on a firm downward trajectory, declining from 77.3% of GDP in 2023 to less than 50.0% in 2029, down by more than 40 percentage points of GDP over a 10-year period.

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

The ratings/Outlooks could be upgraded if, individually or collectively: i) banking sector and/or macroeconomic vulnerabilities related to high private and external debt are structurally reduced; ii) external economic resilience is strengthened sustainably, for instance through the development of high value-added export sectors or lower energy import dependence; and/or iii) fiscal discipline is maintained, resulting in a material decline in public debt.

Conversely, the ratings/Outlooks could be downgraded, if individually or collectively: i) the debt trajectory weakens, for instance due to fiscal loosening or the crystallisation of contingent liabilities; ii) the growth outlook deteriorates substantially; iii) banking sector fragilities re-emerge posing risks to the economy and/or the sovereign balance sheet; and/or iv) external finances deteriorate substantially, for instance due to an external shock or heightened commodity price volatility.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Ratings, 29 January 2024) 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 Thomas Gillet, Director

© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.