Capital Intelligence Ratings (CI) has affirmed the Long-Term Foreign Currency Rating of the Republic of Cyprus at ‘BBB+’. At the same time, the rating agency has affirmed the sovereign’s Short-Term Foreign Currency Rating at ‘A2’. The outlook for the ratings remains stable.
According to the agency, the ratings are supported by the sustained strengthening of the public finances, which is reflected in persistent general government budget surpluses, declining government debt, and low short- to medium-term fiscal risks. "Active public debt management has helped reduce refinancing pressures, while sizeable government cash buffers provide a strong safeguard against near-term shocks," it notes.
The ratings also reflect the continued reduction in contingent liabilities stemming from the banking sector, underpinned by a continued decline in macro-financial imbalances and improving banking sector resilience.
According to a press release issued by the agency, the ratings are further supported by Cyprus’s resilient economic performance, with growth remaining among the strongest in the euro area.
"The economy benefits from high GDP per capita, strong inflows of foreign direct investment, and a diversified services-oriented model centred on tourism, business services, shipping, and ICT. Institutional and financial support stemming from EU and euro area membership, including access to Recovery and Resilience Facility (RRF) funding, also underpins the sovereign’s ratings," CI says.
Sizeable external imbalances and structural challenges
According to the rating agency, the ratings are constrained by sizeable external imbalances and structural challenges. These include large current account deficits, elevated external debt and very high external financing needs. Additional constraints stem from the still large stock of non-performing loans managed by credit-acquiring companies (CACs), structural labour market and productivity challenges, as well as medium- to long-term fiscal pressures linked to the General Healthcare System (GHS) and population ageing.
Rising geopolitical risks, particularly the regional spillovers from the US-Israel war with Iran, also weigh on the ratings. As it is noted, escalating military conflict between the US-Israel and Iran represents a rising geopolitical risk for Cyprus, due to the island’s proximity to the Middle East and its reliance on externally driven service sectors. Direct spillovers have so far been limited, although security incidents involving British military facilities on the island highlight Cyprus’s exposure to regional instability.
According to CI, the main transmission channels are likely to be indirect. Heightened geopolitical risk has started to weaken tourism demand, while disruptions to global energy markets and Gulf shipping routes are increasing import costs for the highly energy-dependent economy. "A prolonged escalation would likely intensify these pressures through weaker tourism inflows, higher inflation, and increased volatility in maritime and aviation routes across the Eastern Mediterranean," it says, noting that under an extreme downside scenario involving broader regional spillovers, Cyprus could also face capital outflows and expatriate workforce relocation, with negative implications for economic activity and public finances.
However, the agency notes that CI’s baseline scenario assumes that military hostilities will not last beyond April 2026, and that the impact on the economy will be limited.
Regarding the banking system, the agency says that risks continue to recede. The sector’s size declined to 186.1% of GDP in September 2025, from 188.7% in 2024, while capitalisation remained strong. According to the Central Bank of Cyprus, the aggregate NPL ratio fell to 4.5% of total loans in September 2025 (from 6.2% in December 2024), with provisioning coverage increasing marginally to 68.5% (from 59.9%). "Banks remain well-capitalised, with an average CET1 ratio of 27.4% as of September 2025, the highest in the EU. Liquidity and profitability ratios are also sound at present," CI says.
Nonetheless, it notes that the large stock of non-performing assets held outside of the banking system by CACs continues to weigh on the ratings. Private sector NPLs managed by CACs amounted to €19.7 bn (54.1% of GDP) in June 2025.
Economic growth performance remains strong
Overall, the rating agency says that economic growth performance remains strong, with real GDP expanding by a better-than-expected 3.8% in 2025 (3.9% in 2024), supported by robust activity in hospitality, construction, wholesale and retail trade, and ICT.
Moving forward, CI expects real GDP to increase by an average of 3% in 2026-27, benefitting from robust domestic demand, including ongoing investment in numerous economic activities, supported in part by RRF funding and foreign private capital inflows, as well as strong net services exports. GDP per capita was high at EUR36,686 in 2025, and is considered a supporting factor for the ratings. Unemployment declined to 4.0% in 2025, from 4.9% in 2024.
According to CI, Cyprus' external strength is moderate, owing to large current account deficits and very high external debt. The current account deficit is expected to have narrowed to 7.9% of GDP in 2025 (from 8.3% in 2024), reflecting an increase in the services’ surplus, as well as an improvement in net exports of goods. External debt, excluding SPEs, declined to 164.2% of GDP in September 2025, from 177.9% in December 2024.
As it is noted, the Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months. The outlook balances the significant decline in fiscal risks and strong economic performance, against the large current account deficit, very high external debt and increasing geopolitical uncertainties.
CI notes that the ratings could be upgraded in the next 12 months in the event of further structural improvement in the public finances as well as a durable and lower-than-projected decline in current account deficit and external debt. The ratings could also be upgraded in the event of higher-than-projected deleveraging of the debt of the private sectors as well as the implementation of comprehensive structural reforms that increase institutional strength and lead to the speedier resolution of transferred NPLs.
Conversely, the ratings could be downgraded in the next 12 months, should fiscal performance weaken and public debt dynamics reverse due, for example, to a shift in policy direction, a decline in fiscal discipline or significantly weaker economic performance, or if adverse shocks trigger a deterioration in the public and/or external finances.
(Source: CNA)
