Morningstar DBRS upgrade of Cyprus’ outlook was “expected”, Andreas Charalambous, Chairman of the Cyprus Fiscal Council, told CNA, noting that Cyprus’ strong fiscal position provides an opportunity to address long-standing structural problems. He nevertheless warned of potential fiscal risks arising from pension reform as well as the upcoming pre-election period since the next Cypriot presidential election is scheduled to take place in February 2028.
Asked to comment on the rating decision by Canadian credit rating agency Morningstar DBRS, he said it was ‘an expected development, which reflects Cyprus’ positive macroeconomic data and, in particular, its strong fiscal position.’
He noted that the Fiscal Council’s report, scheduled to be published in mid-September, states that the country’s strong fiscal position gives Cyprus the opportunity to address chronic structural problems related to the economy’s underlying characteristics, social inequalities and climate-change issues. ‘It gives us an opportunity to address these problems, which have persisted for years, and that is how we should view it,’ he said.
Asked whether the agency’s revision of the trend on the Republic of Cyprus’ long-term ratings to ‘positive’ from ‘stable’ anticipates a future upgrade of the country’s sovereign credit rating, he said that the revision means that ‘we are moving in the right direction, and, if we continue, such a possibility will arise.’
He stressed, however, that one issue still reflected in foreign rating agencies’ assessments of Cyprus is that historically ‘we have had fluctuations. We have not always been consistent in maintaining strong fiscal performance. There have been periods with very poor results. They are still waiting to see a long period of stability and strong performance before they can move towards even better ratings.’
According to DBRS, potential reasons for a future upgrade include a further reduction in the public-debt ratio in line with current expectations, evidence of greater economic resilience, and higher levels of labour productivity.
Asked what could lead to a further increase in labour productivity in Cyprus, the President of the Fiscal Council told CNA that productivity is linked to investment and adaptation in the fields of technology and artificial intelligence. Other factors, he said, include the continuous training of the workforce.
He added that, so far, Cyprus’ growth has relied to a large extent on migration, increasing employment. ‘This is reaching its limits. In the future, economic performance will depend on productivity. The domestic population is not growing, while migration has already reached high levels. We know from international experience that beyond certain levels, it cannot continue at the same pace,’ he said. Therefore, he noted, productivity will increasingly be the key.
Regarding DBRS’ condition for a future upgrade, concerning continued reductions in the public-debt ratio, the Council Chairman was asked whether the decision, as part of pension reform, to end government borrowing from the Social Insurance Fund and repay the amounts owed could jeopardise the downward trajectory of public debt. He replied that the decision should be implemented gradually.
‘We should start by ending additional borrowing from the Social Insurance Fund, and this should happen once we have established institutions capable of investing properly. At present, we do not have them. We need to establish these institutions during 2026-2027 and, possibly from 2028, begin channeling surpluses into this dedicated fund and investing them for the benefit of pensioners. Repayment should take place over a long period of time, precisely in order to avoid this risk,’ he stressed.
He also noted that any additional measures currently being discussed as part of the reform should be subject to actuarial assessment.
Similarly, he pointed out that one of the problems in the past was that spending overruns occurred during pre-election periods, ‘and we are paying the price for that.’ ‘Particularly during pre-election periods, we must be able to demonstrate that we can maintain sound and fiscally prudent policy,’ he said.
Invited to comment on the DBRS report’s observation that the impact of the war in the Middle East on the Cypriot economy had been smaller than expected, he said that, overall, the effects had been milder. ‘There were various reasons at the global level, mainly the investments being made in the technology sector,’ he noted.
Specifically, regarding Cyprus, he said that what has supported growth over the past couple of years is the increase in the population due to the migration of relatively well-paid individuals. ‘This translates into consumer demand and has favourable implications for the economy,’ he said, noting that this is the main reason, although not the only one.
He nevertheless noted that Cyprus is disproportionately affected by energy prices ‘because we have not made significant progress in reducing our dependence on conventional forms of energy. As a result, every energy crisis hits us disproportionately, to a much greater extent.’
Asked about the impact on the economy of Cyprus’ decline in corruption and rule-of-law indicators to below the EU average, as noted in DBRS’ report, Charalambous said that, in an open country such as Cyprus, ‘which also relies on its attractiveness to foreign investment and on attracting foreign companies to establish themselves in Cyprus, all these factors play a major role, and therefore the relevant authorities must take corruption issues seriously.’
He also referred to issues surrounding the justice system, noting that another constraint on the Cypriot economy is the delay in the administration of justice. ‘We could do much better if we had made progress in the field of justice and in combating corruption, which is also linked to the effective interaction and balance between the various branches of government,’ he said.