Cyprus's Credit Rating Upgraded by Scope Ratings

German rating agency Scope Ratings has upgraded the Republic of Cyprus's long-term rating from BBB to BBB+ with a stable outlook, indicating confidence in the country's economic fundamentals. The upgrade is attributed to Cyprus's robust economic performance, favorable fiscal prospects, positive debt trajectory, and improvements in the banking sector's vulnerabilities. Despite challenges such as a small and open economic structure, high non-performing loans, and increased borrowing, Scope Ratings sees balanced risks for Cyprus over the next 12 to 18 months.

The agency highlights Cyprus's commitment to fiscal discipline, strong growth, and resilient fiscal performance leading to surpluses by the end of 2022. The upgrade also reflects better-than-expected economic performance amid external challenges and inflationary pressures. Structural reform dynamics and public investments under the national reform program and the Recovery and Resilience Plan contribute to stable medium and long-term growth prospects.

Scope Ratings acknowledges the continuous improvement in the financial sector, with reduced non-performing loans and strengthened capital levels in banks despite the impact of the Covid-19 pandemic and the high cost of living. However, the BBB+ assessment is constrained by Cyprus's characteristics, including its small and externally dependent economy, persisting vulnerabilities in the banking sector, high debt levels, and sensitivity to fluctuations.

The European Central Bank (ECB) recently accepted Scope Ratings as a new external credit rating agency, broadening the acceptable sources of credit assessments. In a separate report, Standard and Poor's (S&P) emphasized the need for Cypriot banks to balance cost reduction with digital investment to counter inflation and high credit provisions. S&P noted that non-performing loans in Cyprus's banks remain notably high, posing challenges amid economic conditions. Economic growth above the EU average is expected, but risks from exposure to Russia and reduced investment programs exist. S&P also mentioned the government's mortgage-to-rent scheme as a potential solution for addressing household non-performing loans.

The upgraded credit rating and positive outlook signal increased confidence in Cyprus's economic resilience and responsible fiscal management, despite ongoing challenges and uncertainties in the global economic environment.

By fLEXI tEAM