Moody's Investors Services has upgraded the long-term government bond ratings of Cyprus to Ba3 from B1.
"The decision to maintain a positive outlook on the rating of Cyprus reflects Moody's view that improvements in economic resilience and continuing fiscal out-performance are likely to be sustained," said a statement made available in Cyprus on Saturday.
It also said that it expects the country's sovereign debt to be brought down to 95 percent of GDP by 2020 from its 2016 level of 108 percent.
Moody's added that interest charges absorbed just 6.6 percent of general government revenue last year, down from a peak of 9.2 percent in 2013 when Cyprus was bailed-out after an economic collapse in a 10-billion-euro economic assistance program by the European Stability Mechanism and the International Monetary Fund.
Moody's said the assistance program increases pressure on Cyprus' borrowing costs, but this is offset by the prevailing low interest rate environment and liquidity buffer that covers debt repayment for the next year.
Moody's assessment expects the country's 2.8 percent GDP growth in real terms in 2016 to be continued over the medium term, driven by private consumption and favourable developments in the tourist and labour market sectors.