Cyprus’ credit rating was recently upgraded from Baa2 to A3 by Moody’s. The double upgrade reflects, firstly, the improvement in the country’s fiscal indicators. Public debt has fallen sharply, from 114 per cent of GDP in 2020 to 73 per cent in 2023, with a further reduction to 50 per cent expected by 2027.

Secondly, the economy’s positive medium-term prospects, centred on highly productive services, such as software development and financial services. These services are supported by the transfer of headquarters of a significant number of foreign companies to Cyprus, extensive net migration and foreign investment (mainly in energy, education, health, construction and tourism).

And thirdly, the ongoing deleveraging and strengthening of the credit capacity of Cypriot banks, which have contained the risks related to the quality of their portfolio.

The upgrade is expected to have two tangible benefits.

It will further reduce the borrowing costs of the Republic which, combined with lower budget deficits, will allow more funds to be directed to productive uses.

In this respect, the previous upgrades by other rating agencies contributed to the reduction of the interest rate spread between the ten-year bond of Cyprus and Germany, from 200 to 70 basis points, over the last two years.

The improved credit rating is also expected to bolster Cyprus’ image as an attractive destination for investment, thereby contributing to further economic growth and the creation of new quality jobs.

Nevertheless, significant challenges persist, which negatively affect the country’s long-term outlook.

Our country lags in the critical areas of climate and digital transition. Better targeting of expenditures and an increase in public investments, which remain stuck at low levels, are required.

The fiscal margins that exist, as well as the more efficient absorption of funds available from the Recovery and Resilience Fund, would allow the channelling of investments towards the climate and digital transition, but also towards other sectors, with favourable long-term prospects.

Furthermore, there are strong needs for reforms in areas related to the state, such as justice, public administration, tax reform and public and private sector cooperation to promote large investment projects.

At the same time, a number of substantial issues which affect long-term sustainability exist, including pensions and the social insurance system’s ongoing viability, adaptation of the education system to current market needs and healthcare.

In summary, the upgrade of Cyprus’ credit rating is an important milestone and reflects the country’s improved resilience. In 2012, Moody’s downgraded Cyprus to non-investment grade and it took 12 years to get back to investment grade.

We must, therefore, maintain fiscal discipline while, simultaneously, focusing our attention on better targeting and improving the quality of public spending, upgrading the framework governing major infrastructure projects and promoting reforms, with an emphasis on, among others, the tax system and the field of justice.

Andreas Charalambous and Omiros Pissarides are economists and the opinions they express are personal