Cyprus outlook revised to positive at S&P on external and fiscal deleveraging
Investing.com -- S&P Global Ratings revised Cyprus’s outlook to positive from stable on Friday, while affirming its ’A-/A-2’ sovereign credit ratings.
The positive outlook primarily reflects the potential for Cyprus’s external debt position to strengthen beyond baseline expectations over the next few years, driven by both public and private external deleveraging and strong services exports.
Despite Cyprus recording current account deficits averaging over 8% of GDP annually over the last five years, these have been primarily financed through net foreign direct investment inflows, while the economy’s gross external debt has continued to decrease.
The outlook revision also reflects Cyprus’s continued fiscal deleveraging, with net general government debt declining both as a percentage of GDP and in nominal terms. Strong economic expansion and labor market gains have supported high tax revenue and social security contributions.
S&P expects fiscal surpluses to average 3.3% of GDP during 2025-2028, resulting in government debt, net of liquid assets, declining to 35% of GDP by 2028 from 56% in 2024 and almost 90% in 2019.
Cyprus’s economy has benefited from a booming services sector, particularly tourism, despite fewer arrivals from previously important countries like Russia. The economy has also seen a steep increase in information, technology and communications services as firms relocate to Cyprus.
S&P expects domestic demand to become a more prominent growth driver as consumption benefits from a healthy labor market and strong real income growth. Investments are expected to expand due to a substantial pipeline of private and public investments, with the latter benefiting from NGEU funds.
The ratings agency forecasts real GDP growth of 3.3% for 2025, with growth slightly below 3% on average between 2026 and 2028.
Cyprus’s ratings remain supported by its effective governance, eurozone membership advantages, and gradual improvement in the domestic financial sector. However, they are constrained by high external deficits and a large stock of external debt.
The long-delayed liquefied natural gas terminal at Vasilikos is expected to be operational in the second half of 2026, which should substantially reduce Cyprus’s energy costs, currently among the highest in the EU.
As of September 30, 2025, Cyprus’s gross government debt to GDP has fallen below the Maastricht Treaty threshold of 60% for the first time since 2010, with interest payments at 2.9% of government revenue last year, below the euro area average of 3.5%.
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