The international rating agency Morningstar DBRS has affirmed Cyprus's BBB (high) long-term credit rating, maintaining a stable outlook. The agency highlighted that Cyprus's robust economic and fiscal performance balances out significant downside risks.

According to Morningstar DBRS, Cyprus experienced a 2.5% real GDP growth in 2023, significantly higher than the Euro area’s average of 0.4%. This growth has been instrumental in strengthening public finances and contributing to the reduction of the debt-to-GDP ratio to 77.4% by the end of 2023.

The agency recognized the stability of Cyprus’s political environment, along with the government's sound fiscal and economic policies, as key supports for the country’s high ratings. Moreover, the favorable government debt profile was also a contributing factor.

The economic outlook for Cyprus remains positive, fueled by increasing private consumption due to real wage growth and solid employment figures. Investment activity is expected to receive a boost from the inflow of Next Generation EU funds and several major investment projects, especially in tourism and residential real estate.

The Central Bank of Cyprus predicts a moderate increase in real GDP growth, projecting it to rise to 2.6% in 2024 and 3.1% in 2025. However, Morningstar cautions that this growth is susceptible to risks like the ongoing military conflict in Ukraine and potential trade disruptions in the Red Sea.

Fiscally, Cyprus’s general government budget surplus increased to 2.9% of GDP in 2023, up from 2.4% in 2022, thanks to robust revenue growth. Public revenues are likely to continue benefiting from strong economic growth, with government forecasts indicating surpluses of 2.8% of GDP in both 2024 and 2025.

The agency noted some budgetary pressures, such as the revision of the cost of living allowance impacting public sector wages and pensions, as well as deficits in the State Health Organization and expansions in KEDIPES. However, it warned that any significant economic downturn could pose a risk to these fiscal projections.

Regarding public debt, the agency reported a decline in Cyprus’s debt-to-GDP ratio to 77.4% in 2023, with further reductions expected due to budgetary surpluses and favorable debt dynamics. The government’s large cash buffer, amounting to 9.5% of GDP as of December 2023, also mitigates short-term funding risks.

The financial sector in Cyprus is seen as stable, underpinned by strong capitalization and liquidity in the banking sector. Despite the marked reduction in non-performing loan (NPL) ratios since the 2012-2013 crisis, their level remains higher than in most Euro Area economies.

In terms of Cyprus' reunification talks facilitated by the United Nations, Morningstar DBRS maintains that significant progress appears limited at this stage.