S&P Revises Cyprus’ Outlook to Positive as External Position Strengthens

S&P Global Ratings shifted its outlook for the Cypriot economy to “positive” from “stable” late on Friday, pointing to a faster-than-anticipated improvement in the country’s external debt metrics.

The agency confirmed the Republic of Cyprus’ credit score at “A-/A-2” for both long-term and short-term obligations, in domestic and foreign currency.

According to S&P, the upgraded outlook reflects its expectation that Cyprus’ external position will exceed current forecasts over the coming two years, as the country continues to unwind external debt at an accelerated pace. The agency noted that an additional upgrade could follow “if the reduction in net external leverage continues at a stronger pace than estimated.”

Despite ongoing current account deficits, S&P emphasised that these shortfalls are mainly financed by steady inflows of foreign direct investment, which in turn support the gradual retreat of external debt. Still, the report cautioned that deterioration in the global environment — including weaker performance among Cyprus’ key trading partners or rising geopolitical tensions — could strain economic activity, public finances and banking-sector stability.

The revision, S&P explained, is primarily driven by expectations of a further improvement in Cyprus’ external metrics, bolstered by continued deleveraging across both the public and private sectors and by resilient services exports. Although Cyprus has recorded persistent deficits exceeding 8% of GDP over the last five years, gross external debt continues to decline.

S&P also highlighted Cyprus’ strong fiscal trajectory. A combination of robust economic performance and high employment levels has significantly boosted tax income and social security contributions, while government spending has been kept under control. This dynamic has enabled consistent fiscal surpluses and a continued drop in public debt. The agency projects an average surplus of 3.3% of GDP between 2025 and 2028, with net debt expected to fall to 35% of GDP by 2028 — down from 56% in 2024 and nearly 90% in 2019.

Economic momentum remained solid into early 2025, with S&P predicting full-year growth of 3.3%. After strong rebounds in tourism and the arrival of technology firms, the agency expects growth to be increasingly supported by domestic demand, rising purchasing power and investment flows, including more than €500 million still to be deployed from the Recovery Fund through 2026. According to S&P, the Cypriot economy has shown notable resilience to the war in Ukraine and the conflict in the Middle East, and its limited trade ties with the U.S. and China insulate it from bilateral tensions — though sluggish conditions in Europe could still create knock-on risks.

On governance and institutions, S&P stated that Cyprus maintains a comparatively strong framework, underpinned by cautious fiscal planning and stable, consensus-driven policymaking. Reforms linked to the EU Recovery and Resilience Plan are expected to stay on track.

Energy security remains a central government ambition. The agency referenced the prolonged delays in the Vasilikos natural gas terminal, which is now anticipated to begin operating in the second half of 2026 and should help reduce the island’s exceptionally high energy costs. It also noted that progress on the Great Sea Interconnector remains “frozen” due to disagreements with Turkey, although the initiative has secured significant EU funding.

Gas exploration is proceeding, with production expected to start in 2028 and Egypt identified as the main export destination. While future gas revenues could strengthen public finances, S&P pointed out that “uncertainty surrounding the project” prevents the agency from factoring these proceeds into its baseline scenario. On political developments, the report observed that the election of Tufan Erhürman in the occupied areas “may create room for improved dialogue,” though fundamental issues remain unresolved.

S&P noted that Cyprus posted a surplus of 4.1% of GDP in 2024 — a record high — and that initial data for 2025 shows only minimal softening. Revenues increased more than 6% in the first nine months, buoyed by the relocation of foreign companies, employment growth and a 7.3% jump in social security contributions. Public investment climbed nearly 30% in the same timeframe.

S&P anticipates that surpluses will average 3.3% of GDP through 2028, reinforcing buffers against future shocks. Even so, long-term pressures persist, including demographic aging, climate-related vulnerabilities and high public-sector wage commitments. The agency also remarked that the ATA system leaves Cyprus more exposed to inflationary risks than other countries.

Public debt continues to fall and has dropped below the Maastricht benchmark of 60% of GDP for the first time since 2010. Interest payments amounted to just 2.9% of revenue in 2024. Meanwhile, substantial cash reserves — totalling €3.9 billion, or 11% of GDP — enabled early repayment of legacy crisis-era loans.

The current account deficit remains sizeable, averaging 8.4% of GDP between 2021 and 2024, largely because of a primary income deficit created by foreign-owned corporations operating in Cyprus. Inflation fell sharply to 0.3% in October, driven by declines in energy, goods and food prices as well as a stronger euro. S&P expects inflation to stabilise just above 2% between 2026 and 2028, slightly above the ECB’s target.

The banking system continues to improve, with the NPL ratio easing to 5.5% (or 2.9% under the EBA definition). Banks remain profitable and well-capitalised, with high liquidity, although a significant volume of problematic assets persists within credit acquisition companies. Domestic credit growth is forecast to reach 2.5% in 2025 after several years of contraction.

Overall, S&P concluded that Cyprus’ strengthening external metrics, robust fiscal fundamentals, resilient growth dynamics and solid institutional framework justify its newly positive outlook. 

By fLEXI tEAM