THE BENEFITS OF UPGRADING - Filenews 27/9 by Dr Andreas Charitou
The recent upgrade of the credit rating of the Republic of Cyprus from "A-" to "A" by the international rating agency Standard & Poor's (S&P), for the first time in 16 years, is a particularly important development.
It is not just an external confirmation of the progress and resilience of the economy. At the same time, it strengthens the country's credibility in international markets and can have a substantial economic impact for citizens and businesses.But how easy is it for a small economy to upgrade to 'A' level in an environment of intense geopolitical uncertainty, with conflicts in the Middle East and the Russia-Ukraine war continuing? What does such an upgrade mean in practice and what are the tangible economic benefits?
And, above all, through which mechanisms can these benefits reach households, small and medium-sized enterprises (SMEs), young people, pensioners and farmers? Finally, what is required for the upgrade to be maintained and exploited for the benefit of the economy and society in the long term? These are the questions that determine the real economic and social significance of upgrading.
Why it was upgraded;
The recent upgrade does not reflect a single good indicator, but the combined and long-term strengthening of the economy, public finances and the banking system, which is linked, inter alia, to prudent fiscal management, which has strengthened the resilience of the Cypriot economy.
The economy grew by 3.8% in 2025 and S&P forecasts growth of 2.7% in 2026, more than double the 1.1% forecast for the European Union (EU), despite adverse geopolitical developments in the wider region.
The fiscal performance is even stronger: the surplus stood at 3.4% of GDP in 2025, the highest in the EU, compared to a budget deficit of 3.1% in the EU.
– At the same time, public debt fell to 55% of GDP in 2025, from 114.9% in 2020 and is expected to fall to 50.4% in 2026, having already fallen below the Maastricht 60% threshold for the first time since 2010, compared to 84.2% in the EU.
– Unemployment fell to 4.4% in 2025, the lowest annual level since 2008, compared to a peak of 16.1% in 2014 (forecast for 2026: 4.2%). Parallel and particularly important has been the consolidation of the banking system: non-performing loans (NPLs) have fallen drastically to 1.6% in 2025, from levels of more than 45% in the middle of the previous decade.
The upgrade by S&P should not lead to an underestimation of the challenges that the economy still faces, nor should it be a cause for complacency. At the same time, however, the improvement in growth, public finances, debt, employment and the banking system can hardly be considered cyclical. It reflects broader progress, linked to prudent fiscal management, strong growth and multiannual consolidation and tighter supervision of the banking system.
The critical question therefore shifts from whether the key indicators have improved to whether this progress translates into real and measurable economic and social benefits for households and businesses.
Is there a real return?
Upgrading is not just a positive economic indicator; It strengthens the country's credibility in international markets and can have a wider economic and social impact on the state, businesses and, gradually, households. A stronger credit profile can reduce financing costs, boost investor confidence, and broaden the base of international institutional investors considering investments in Cyprus.
One of the most immediate and measurable benefits concerns the cost of financing the State. At the end of 2025, public debt was €20.08 billion. and interest expenses of €418.7 million. Indicatively, a reduction of one percentage point in the average financing cost of this total debt theoretically corresponds to approximately €201 million. per year. The savings, however, are not automatic, nor immediate, as it mainly concerns new borrowing and debt that is refinanced and depends on the conditions in the international markets.
The benefit can be broader when increased credibility is transmitted to the real economy, improving the financing conditions of banks and businesses and boosting productive investment in technology, innovation, exports and business expansion. In this way, productivity, competitiveness and employment can be enhanced, while part of the benefit can be passed on to SMEs and households through more favourable financing.
This transmission, however, is not automatic. Interest rates are also affected by ECB interest rates, inflation, credit risk and competition in the banking system. Upgrading, therefore, does not create prosperity on its own. However, it substantially improves the conditions in which it can be created.
How the benefit reaches the real economy
Has the improvement of economic indicators reached everyday life? Strong growth, fiscal surpluses, a reduction in public debt and a stronger credit rating are not an end in themselves. They create the fiscal space and credibility that allow the state to exercise a more effective and sustainable social and development policy. When, on the other hand, growth is weak, deficits are high and debt is rising, the possibilities for substantial interventions are limited.
A typical example is the 2026 tax reform. The tax-free allowance was increased, tax scales were widened and additional deductions were introduced, with a direct benefit for the disposable income of many households.
At the same time, significant resources have been allocated to housing policy for one of the most serious problems of young couples and families: according to government data, the total government investment has exceeded €300 million, while the construction of new affordable housing is being promoted. Support is also directed to the productive economy.
Additional support measures were approved for farmers, while in 2026 the Cyprus Business Development Agency was established, with the aim of improving access to finance for SMEs, start-ups and the self-employed and addressing funding gaps in the market.
This is where the real meaning of strong economic performance lies: to translate into greater policy capacity and, ultimately, higher disposable income, more investment, better access to housing and finance, and more job opportunities. The next step is the even more targeted use of this fiscal space, so that the available resources are directed to where the social and development needs are greatest and the benefit for the economy and society is more substantial
Has the improvement of economic indicators reached everyday life? Strong growth, fiscal surpluses, a reduction in public debt and a stronger credit rating are not an end in themselves. They create the fiscal space and credibility that allow the state to exercise a more effective and sustainable social and development policy. When, on the other hand, growth is weak, deficits are high and debt is rising, the possibilities for substantial interventions are limited.
A typical example is the 2026 tax reform. The tax-free allowance was increased, tax scales were widened and additional deductions were introduced, with a direct benefit for the disposable income of many households.
At the same time, significant resources have been allocated to housing policy for one of the most serious problems of young couples and families: according to government data, the total government investment has exceeded €300 million, while the construction of new affordable housing is being promoted. Support is also directed to the productive economy.
Additional support measures were approved for farmers, while in 2026 the Cyprus Business Development Agency was established, with the aim of improving access to finance for SMEs, start-ups and the self-employed and addressing funding gaps in the market.
This is where the real meaning of strong economic performance lies: to translate into greater policy capacity and, ultimately, higher disposable income, more investment, better access to housing and finance, and more job opportunities. The next step is the even more targeted use of this fiscal space, so that the available resources are directed to where the social and development needs are greatest and the benefit for the economy and society is more substantial
Upgrading as an opportunity for the next step
The successful course of the Cypriot economy was not without cost. The fiscal adjustment and reforms of previous years have required efforts and, in many cases, sacrifices from citizens.
The greatly improved macroeconomic results and successive upgrades are, however, a substantial reward for this effort and, above all, create stronger foundations not only for today's economy and society, but also for future generations.
This stronger base broadens economic policy options and creates better conditions for investment, support for the productive economy and targeted interventions for citizens.
The challenge now is to use it wisely and targeted: by maintaining fiscal discipline, more productive investments and more effective diffusion of the benefits of growth. Thus, the upgrade is not only a recognition of what has been achieved, but a solid foundation for a more resilient, competitive and socially sustainable economy for all.
The successful course of the Cypriot economy was not without cost. The fiscal adjustment and reforms of previous years have required efforts and, in many cases, sacrifices from citizens.
The greatly improved macroeconomic results and successive upgrades are, however, a substantial reward for this effort and, above all, create stronger foundations not only for today's economy and society, but also for future generations.
This stronger base broadens economic policy options and creates better conditions for investment, support for the productive economy and targeted interventions for citizens.
The challenge now is to use it wisely and targeted: by maintaining fiscal discipline, more productive investments and more effective diffusion of the benefits of growth. Thus, the upgrade is not only a recognition of what has been achieved, but a solid foundation for a more resilient, competitive and socially sustainable economy for all.
The next day's bet
The next challenge is to maintain the momentum of upgrading and, above all, to exploit it in a way that strengthens long-term resilience, the productive base of the economy and social cohesion, as well as the wider diffusion of the benefits of growth. This presupposes three main pillars.
– First, more productive investments and addressing structural weaknesses. The additional fiscal space must be directed to digitalization, innovation, skills, research, SMEs, exports and especially energy and renewable energy sources (RES). High energy dependence makes Cyprus particularly vulnerable to geopolitical crises, increases in energy costs and inflationary pressures. The answer is more diversified growth, higher productivity, boosted exports and a gradual reduction in energy dependence.
– Second, maintaining fiscal discipline. Creating more fiscal space is important, but its value depends on how it is used. Channeling it into permanent and difficult to reverse expenditure can limit the ability to react to future crises. Particular attention is needed for wage costs and inelastic public spending. Fiscal discipline is not an end in itself, but a prerequisite for maintaining the ability to support the economy and society when needed.
– Thirdly, strengthening the social dimension of development. Stronger economic performance becomes more valuable when its benefits are spilled over to wider layers of society. The risk of poverty or social exclusion (AROPE) decreased from 18.2% in 2020 to 17.1% in 2025, compared to 20.9% in the EU, ranking Cyprus among the seven countries with the lowest rates.
Indicatively, in Greece the corresponding index amounts to 27.5%. However, its stabilisation at around 17% shows that further targeted policies on disposable income, employment and social mobility are needed, with available resources being directed as a priority to where the needs are greatest, without undermining fiscal discipline.
* Ph.D., CMA (USA), FCPA (Aust)
University of Cyprus
http://www.ucy.ac.cy/~charitou.aspx
http://ssrn.com/author=33395
The next challenge is to maintain the momentum of upgrading and, above all, to exploit it in a way that strengthens long-term resilience, the productive base of the economy and social cohesion, as well as the wider diffusion of the benefits of growth. This presupposes three main pillars.
– First, more productive investments and addressing structural weaknesses. The additional fiscal space must be directed to digitalization, innovation, skills, research, SMEs, exports and especially energy and renewable energy sources (RES). High energy dependence makes Cyprus particularly vulnerable to geopolitical crises, increases in energy costs and inflationary pressures. The answer is more diversified growth, higher productivity, boosted exports and a gradual reduction in energy dependence.
– Second, maintaining fiscal discipline. Creating more fiscal space is important, but its value depends on how it is used. Channeling it into permanent and difficult to reverse expenditure can limit the ability to react to future crises. Particular attention is needed for wage costs and inelastic public spending. Fiscal discipline is not an end in itself, but a prerequisite for maintaining the ability to support the economy and society when needed.
– Thirdly, strengthening the social dimension of development. Stronger economic performance becomes more valuable when its benefits are spilled over to wider layers of society. The risk of poverty or social exclusion (AROPE) decreased from 18.2% in 2020 to 17.1% in 2025, compared to 20.9% in the EU, ranking Cyprus among the seven countries with the lowest rates.
Indicatively, in Greece the corresponding index amounts to 27.5%. However, its stabilisation at around 17% shows that further targeted policies on disposable income, employment and social mobility are needed, with available resources being directed as a priority to where the needs are greatest, without undermining fiscal discipline.
* Ph.D., CMA (USA), FCPA (Aust)
University of Cyprus
http://www.ucy.ac.cy/~charitou.aspx
http://ssrn.com/author=33395
