Scope Ratings GmbH, a German rating agency, has upgraded the long-term rating of the Republic of Cyprus from BBB to BBB+. This upgrade reflects a stable outlook for the Cypriot economy.

The agency attributes this upgrade to Cyprus' robust fundamental economic indicators, favorable fiscal prospects, and the trajectory of its public debt. Additionally, the reduction of vulnerabilities in the banking sector has played a crucial role.

However, the Cypriot economy faces challenges, as highlighted by Scope. These include its small, open nature, a high proportion of non-performing loans, and increased borrowing.

The stable outlook mirrors Scope's view that risks to Cyprus' ratings are balanced over the next 12 to 18 months.

Scope also affirmed Cyprus' short-term rating at S-2, maintaining a stable outlook in both local and foreign currencies.

Specifically, the agency's decision to upgrade Cyprus' credit ratings to BBB+ from BBB reflects a "highly favorable trajectory of public debt, leading to a steady reduction in debt levels, supported by strong growth, resilient fiscal performance with a return to fiscal surpluses from the end of 2022, and a commitment to ongoing fiscal discipline."

Furthermore, the upgrade reflects "better-than-expected economic performances, continuing resilience amidst adverse external conditions and inflationary pressures, with stable medium- and long-term growth prospects compared to peer countries, also supported by the healthy dynamics of structural reforms and public investments," as part of the national reform program and the Recovery and Resilience Plan.

Additionally, Scope notes that the upgrade is due to the ongoing improvement in the financial sector, with a reduction in the size of the banking sector overall, and a decrease in non-performing loan ratios, even amid the Covid-19 pandemic and high living costs, enhancing banks' capitalization levels.

However, the BBB+ rating is constrained by characteristics of Cyprus, such as its small, open, and externally dependent economy, prolonged but improving vulnerabilities in the banking sector, as reflected in the still elevated non-performing loans, and high sensitivity to shocks due to large macroeconomic imbalances, as reflected in high levels of private and public debt, combined with a weak external position.

It is noteworthy that on November 10, 2023, the European Central Bank (ECB) accepted Scope Ratings as a new external credit assessment institution, making the German agency's creditworthiness ratings acceptable under the Eurosystem Credit Assessment Framework (ECAF). Until now, the ECB has accepted ratings from American agencies Fitch, Moody’s, and Standard and Poor’s, and the Canadian agency DBRS.