Credit rating agency Moody’s has outlined both the strengths and emerging challenges of the Cypriot economy in its latest credit opinion on the Republic of Cyprus, incorporating the recent adjustment to the country's fiscal strength assessment.
Among Cyprus' key strengths, Moody’s highlights:
- Strong medium-term growth prospects
- Effective institutions and policymaking
- A steadily improving public debt profile
Three main challenges
The agency identifies three key credit challenges:
- The relatively small size of the economy compared with countries holding a similar credit rating (A3, stable).
- Spending pressures stemming from public-sector wages and the costs associated with an ageing population.
- Exposure to event risks, particularly those linked to the banking sector and geopolitical developments.
"Our credit view on Cyprus balances the country's high wealth levels and strong growth against the limitations of its small economic size," Moody’s said.
The agency notes that public debt remains on a clear downward trajectory, while risks associated with the banking sector have eased, although they have not disappeared entirely.
Stable outlook
According to Moody’s, the stable outlook reflects a balance between economic and fiscal opportunities and risks.
While non-performing loans remain present in the wider economy, the volume still held by banks continues to decline. The agency noted that Cypriot banks generally maintain strong capital buffers and improved profitability.
A small but wealthy economy
Moody’s describes Cyprus as a small, high-income eurozone economy with solid medium-term growth prospects supported by an increasingly diversified services sector.
Economic performance is being driven by:
- A large tourism industry
- A rapidly growing information and communications technology sector
- Significant foreign direct investment inflows
Non-tourism private services continue to account for the largest share of gross value added.
The report also notes that although the labour market remains relatively tight, Cyprus faces persistent skills shortages and demographic challenges that could weigh on long-term growth. These pressures are partly offset by sustained net migration.
Benefits of eurozone membership
The agency says Cyprus benefits from eurozone membership, which provides:
- A credible monetary and macroeconomic framework
- Strong fiscal performance supported by primary surpluses
- Falling debt levels
- Consistent access to international markets
However, Cyprus remains vulnerable to external shocks due to its small and open economy.
Moody’s highlights risks including:
- Geopolitical tensions in the Eastern Mediterranean
- Shifts in global tourism demand
- Changes in external financing conditions
The agency also points to persistent current account deficits and a highly negative net international investment position as additional vulnerabilities.
What could lead to an upgrade?
Moody’s says Cyprus could receive a ratings upgrade if fiscal indicators consistently outperform expectations.
Other factors that could support a higher rating include:
- Stronger-than-expected economic growth
- Increased foreign direct investment
- Positive labour market developments
- Greater benefits from Recovery and Resilience Plan reforms and investments
The agency also notes that future exploitation of Cyprus' natural gas resources, which are not currently included in its forecasts, could support the country's rating over the medium term.
What could trigger a downgrade?
Conversely, Cyprus' rating could come under pressure if fiscal and debt outcomes deteriorate significantly.
Moody’s warns that risks include:
- Faster-than-expected growth in public-sector wage costs
- Rising healthcare spending
- Weaker economic performance
- An outflow of highly skilled foreign workers
- Delays or cancellations of major foreign investment projects
- Continued weakness in the tourism sector
Any materialisation of banking-sector risks or geopolitical tensions could also place downward pressure on Cyprus' credit rating.
