Fitch Ratings upgraded Cyprus’s long-term credit rating to “A” from “A-,” assigning a stable outlook.
According to the agency, the upgrade reflects Cyprus’s continued strong fiscal performance, including the rapid reduction in public debt combined with large fiscal surpluses, which are significantly stronger than those of other countries, as well as strong macroeconomic performance, supported by the economy’s increased diversification.
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The agency notes that Cyprus’s ratings are supported by per capita income higher than the median among “A”-rated countries, strong fiscal performance, and the credibility of policy implementation ensured by its membership in the European Union and the Eurozone.
These strengths, Fitch adds, are offset by governance indicators that are slightly weaker than those of other countries, vulnerabilities in external economic indicators, as well as regional political tensions related to the division of the island.
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Surpluses, debt repayment, and growth are viewed positively; inflationary pressures are acknowledged
Explaining the key rating factors that led to the upgrade, Fitch cites public finances, noting that Cyprus will continue to outperform on the fiscal front, maintaining the highest general government surplus in the eurozone—3.2% of GDP in 2026 (unchanged from 2025), supported by spending restraint and the continued strong performance of public revenues, in a favorable macroeconomic environment.
“We estimate that fiscal surpluses will continue, averaging 2.9% over the 2027–2028 period,” Fitch adds. “The authorities remain committed to sound fiscal policies, which we consider credible given the broad consensus on maintaining fiscal stability, despite significant scope for spending increases,” it continues.
He also notes further that he does not expect significant additional fiscal support to offset higher energy prices beyond the measures already in place, which are estimated at 0.2% of GDP. He also points out that the tax reform has not substantially reduced revenue so far.
Regarding the central government’s debt, Fitch estimates that it is expected to decline rapidly to 46.3% of GDP in 2026 from 52.4% in 2025, and further to 36.6% by 2028, thanks to high primary surpluses and strong nominal growth.
“This represents a dramatic decline of 77 percentage points from its peak in 2020 (one of the sharpest declines globally), placing the debt ratio well below the ‘A’ median (59.5%),” notes Fitch. It clarifies that after 2028, the pace of debt reduction will slow, as surpluses are expected to be used to repay intra-governmental debt to the Social Security Fund.
Regarding interest payments, Fitch notes that they will amount to just 1.1% of GDP in 2025. It adds that, although an increase to 1.5% is projected for 2028 due to refinancing at higher interest rates, the cost remains low by historical standards, noting that “cash reserves amounting to 7.3% of GDP provide additional flexibility.”
Regarding growth prospects, Fitch forecasts a resilient GDP growth rate of 3% for Cyprus during the 2026–2028 period, which exceeds the eurozone average and the median for countries with an “A” rating. “This momentum is fueled by strong domestic consumption and the continued positive performance of the services sector,” the agency notes.
It also points out that the risks associated with the crisis in the Middle East have not materialized, as the economy rebounded rapidly following the weakening of economic conditions during April–May.
“Recent data revisions point to much stronger growth performance for the 2022–2025 period (averaging 6.6% annually) than previously estimated, highlighting positive spillover effects from investment and diversification in the services sector,” Fitch notes, adding that GDP per capita has now converged with the eurozone average.
It goes on to state that Cyprus has a broad investment portfolio, which, combined with rising productivity in key sectors such as information and communications (ICT), is expected to support continued strong growth in the medium term, with potential growth estimated at 3%.
Regarding the labor market, Fitch notes that “it is stable, with historically high labor force participation rates and unemployment projected to average just 3.8% over the forecast period, supporting private consumption.”
It does, however, highlight short-term risks, which “center on inflationary pressures and their impact on consumption, while external vulnerabilities—including the large current account deficit and low energy independence—will remain a key medium-term challenge.”
The agency notes in its assessment that harmonized inflation stood at 5.2% in September, up from just 0.9% in February, reflecting high dependence on fossil fuel imports and rising service prices.
It notes that wage pressures remain moderate, but estimates that there will be a moderate increase in these pressures starting in 2027, as index-linked adjustments take effect, albeit at much slower rates compared to the 2022–2023 period. “We expect inflation to average 2.5% in 2027–2028, down from 4% in 2026, reflecting lower projected energy costs,” the agency states.
As for the external balance, Fitch expects the current account deficit to remain large during 2026–2028 (averaging 8.1% of GDP), as the trade deficit is affected by higher energy costs and a slowdown in the strong growth of service exports seen in previous years.
The agency views the rapid recovery in tourism—following the slowdown caused by the outbreak of war in the Middle East—as a positive development. “As in previous years, steady inflows of Foreign Direct Investment (FDI) will fully finance the current account deficit,” Fitch notes, adding, however, that “reliance on large volumes of capital flows in an environment of geopolitical and security risks, as well as potential shifts in the investment climate, underscore a persistent vulnerability.”
Regarding the banking sector, Fitch notes that it remained resilient during the first half of 2026, with the system demonstrating strong solvency, liquidity, and profitability.
The Common Equity Tier 1 (CET1) ratio stood at 25.5% in June 2026, which is the highest in the European Union, providing banks with substantial safety buffers in the event of a cyclical economic downturn.
The non-performing loan (NPL) ratio remained low at 1.6% in the first half of 2026 from its peak of nearly 45% in 2015, highlighting the significant progress made in addressing past challenges.
Regarding factors that could lead to a negative assessment, the agency cites a sharp increase in the public debt-to-GDP ratio, for example, due to prolonged fiscal easing. With regard to the macroeconomic environment, it cites an external shock that would exacerbate external vulnerabilities and lead to a prolonged slowdown in economic growth.
Factors that could lead to an upgrade include a reduction in vulnerability to external shocks, for example, due to a structural reduction in large current account deficits and/or increased resilience to geopolitical shocks.
Finally, these factors also include a potential significant improvement in per capita GDP and governance indicators toward the levels of higher-rated countries (peers).
Source: CNA
