The agency “upgraded” the outlook on the Republic of Cyprus’s long-term ratings from “stable” to “positive” , the rating agency Morningstar DBRS “revised” the outlook for the Republic of Cyprus’s long-term ratings, while confirming its credit rating at “A.” The outlook for the short-term ratings was also changed to “positive” from “stable,” and the ratings were reaffirmed at R-1 (low).
The agency’s decision, issued late Friday night, signals an increased likelihood of an upgrade in the future, provided that Cyprus’s fiscal indicators and economic resilience continue to improve.
ΣΧΕΤΙΚΑ ΑΡΘΡΑ
These are the risks lurking for the local economy
“The positive outlook reflects Morningstar DBRS’s view that Cyprus will maintain its strong fiscal position and continue to reduce the burden of public debt,” the agency states.
It notes that favorable growth prospects and significant structural fiscal surpluses are expected to bring the public debt-to-GDP ratio down from 49.9% in 2026 to below 40% by 2029.
SEE ALSO: Ministry of Finance: Morningstar DBRS Upgrade Is Yet Another Confirmation of the Economy’s Resilience
Morningstar DBRS expects that private consumption, investment, and strong service exports—from both the tourism and non-tourism sectors—will continue to drive growth. It notes that following a 3.8% increase in GDP in 2025, the Central Bank of Cyprus expects real growth of approximately 3% annually over the forecast period.
The firm also estimates that the impact of the war in the Middle East on the Cypriot economy is less than initially expected, although the decline in tourist arrivals and the rise in imported inflation are expected to weigh on economic activity in 2026.
Strong fiscal position and rapid debt reduction
A key element of the assessment is Cyprus’s fiscal performance. It is noted that the fiscal surplus stood at 3.4% of GDP in 2025, down from 4.1% in 2024, with Morningstar DBRS noting that this is the highest performance in the European Union.
Government revenue reached €15.9 billion, or 43.6% of GDP, in 2025, compared to €9.7 billion, or 41.3% of GDP, in 2019. The firm attributes the increase in revenue to the broadening of the corporate tax base, the policy to attract foreign companies to establish their “headquarters” in Cyprus, as well as rising employment and wages, which boosted social security contributions and personal income tax.
For 2026, the budget surplus is expected to narrow to 2.3% of GDP, due to measures to address the effects of the war in the Middle East, tax reform, and the costs associated with the agreement between KEDIPES and the Hellenic Bank. However, the Ministry of Finance expects the surplus to rebound starting in 2027, averaging 3.1% of GDP over the 2027–2029 period.
The assessment of the public debt trajectory is particularly positive. The debt-to-GDP ratio fell to 55% in 2025, from 96.5% in 2021, and is projected to fall below 50% by the end of 2026 and below 40% by 2029.
SEE ALSO: New vote of confidence in the Cypriot economy from DBRS Morningstar; what the President takes away from the assessment
As noted, a significant portion of intra-governmental debt remains high; however, it is excluded from the calculation of General Government debt. At the same time, in recent years, the high surpluses of the social security system have been used to finance state budget deficits. The accumulated reserve currently stands at approximately €12 billion, an amount equivalent to 33% of GDP, and generates an annual surplus of approximately €1 billion, or 2.7% of GDP. According to Morningstar DBRS, these surpluses constitute a stable source of funding for public finances.
Risks to the central government’s finances could arise if the social security system runs persistent deficits, which would have to be covered through government transfers. However, Morningstar DBRS considers it unlikely that such a scenario will materialize in the coming years. At the same time, any short-term financing risks are mitigated by the central government’s cash reserves, which stood at 6.9% of GDP in July 2026.
According to the agency, the main risks to public finances are linked to the possibility of an economic shock or the realization of potential liabilities related to the large domestic banking sector. Total bank assets exceed 200% of GDP and are characterized by a high degree of concentration.
Factors That Will Determine the Next Rating
The agency also notes the factors that could lead to a credit rating upgrade.
“The credit ratings could be upgraded if the public debt-to-GDP ratio declines in line with current expectations” and if there are “signs of increased economic resilience and rising labor productivity,” it states.
Conversely, the positive outlook could revert to stable if the Cypriot economy’s performance proves less resilient to external pressures and the projected debt reduction falls significantly short of the agency’s expectations. An even more severe deterioration could lead to a downgrade.
“Credit ratings could be downgraded” in the event of a significant deterioration in the public debt trajectory or “a structural change in the economy that weakens growth prospects.”
The banking sector is stronger
The outlook is also positive for the banking sector. The CET1 capital ratio rose to 25.1% in March 2026, up from 17.8% in 2022, while non-performing exposures fell to 1.6%, down from 17.9% in 2019.
Morningstar DBRS believes that the banks’ strong growth prospects, high capital adequacy, and profitability largely offset the risks posed by the remaining non-performing debt. However, the significant stock of non-performing loans that remains in the economy continues to constitute a “structural vulnerability.”
Political and Institutional Factors
The agency notes that the political environment in Cyprus remains stable, despite the more fragmented political landscape that emerged after the May 2026 parliamentary elections. It adds that, due to the presidential system of the Republic of Cyprus, the elections do not affect the composition of the government and, therefore, they are not expected to bring about significant changes in fiscal policy or in the reforms included in the Recovery and Resilience Plan.
With regard to institutional quality, Morningstar DBRS notes that Cyprus’s ranking in the Worldwide Governance Indicators, including, among others, the indices for control of corruption and the rule of law, has declined in recent years and now stands below the European Union average. However, the country’s membership in the EU continues to serve as an important institutional pillar.
With regard to efforts to reunify Cyprus under the auspices of the United Nations, the agency assesses that the chances of significant progress in the talks remain limited at this time.
Source: CNA
