International rating agency Fitch upgraded Cyprus’ long-term credit rating by one notch to ‘BBB’ with a stable outlook.

Fith cited the outperformance of the country’s fiscal balance and growth rate, as well as resilience from the external shock caused by the war in Ukraine, as the reasons behind the upgrade.

Regarding the change of government in Cyprus, Fitch said “we do not expect a substantial change in the broad direction of economic policy under the new administration.”

“The Cypriot economy has shown a degree of resilience to the external shocks brought about by the war in Ukraine,” the agency added, pointing out that real GDP expanded by 5.6% in 2022, above its forecast over a 4.7% growth issued last September.

The agency also noted that tourism expenditure reached above 90% of its 2019 level, despite the absence of tourists from Russia for most of the year, which accounted for accounted for almost 20% of tourist arrivals in 2019, a record year for Cypriot tourism.

“But the loss of this market has been mostly offset by higher numbers from the UK, Israel, and EU countries. Moreover, strong growth in other sectors in the economy, such as information and communications technology services, points to greater diversification of economic activity,” the Fitch noted.

The agency also cited fiscal outperformance, as public finances improved significantly last year, with the general government balance turning from a deficit of 1.7% of GDP in 2021 to a surplus of 2.3% “much higher than Fitch’s forecast of a small deficit at the previous review in September 2022.”

Furthermore, Fitch said for 2023 it expects a lower surplus, due to the slowdown in economic activity, which will lower revenue growth and continued energy-related support measures, forecasting a reduced fiscal surplus of 1.8% this year, before improving marginally to 2.0% of GDP in 2024.

Fitch said economic activity will decelerate this year, “as high inflation erodes real incomes and rising interest rates dampen demand for loans, affecting consumption dynamics and private investment.”

However, the agency pointed out that the deployment of Next Generation EU funds should offset some of the weakness of private domestic demand.

“Overall, we expect real GDP growth of 2.1% this year and 2.7% in 2024, as economic activity expands at a faster pace from the middle of this year,” Fitch added.

On Cyprus’ public debt, Fitch noted that strong nominal GDP growth and the much-improved fiscal position “translated to a sharp decline in the government debt to GDP ratio in 2022, to 86.5%, from 101.1% in 2021.”

“Our projections are consistent with the government debt ratio falling further over the next two years, to 81.3% in 2024,” the agency said, adding that baseline projections assume that the debt ratio will continue to decline over the medium term, to around 73% in 2027.

The agency said it assumes that the Cypriot authorities will preserve a sizeable liquid asset buffer, in line with their prudent debt management strategy, and regularly issue bonds to at least partly cover upcoming debt amortisations.

With yields on government debt rising sharply, the agency noted that “the average cost of Cyprus’s public debt will rise much more slowly, given the average maturity of debt of just under 7.5 years.”

On the banking sector, Fitch said that the overall trend in asset quality improvement in the Cypriot banking sector has been resilient to external shocks to the economy. Just before the spread of the Covid-19 pandemic in January 2020, the non-performing loan (NPL) ratio was 28.0% and declined last year to 10.5% in October from 11.7% in January. […]