Fitch Ratings affirmed Cyprus’ long-term foreign-currency issuer default rating (IDR) at 'A-' with a Positive Outlook.
Cyprus’ ratings, Fitch said, reflect income per capita levels above the 'A' median, strong fiscal outturns and policy credibility supported by EU and eurozone membership. These strengths are balanced by slightly weaker governance indicators than peers, vulnerabilities in external finances and a backdrop of regional political tensions related to the division of the island, it notes, adding that the Positive Outlook is driven by continued debt deleveraging and favourable growth prospects that are increasing fiscal and external resilience.
On resilience to external challenges, according to the rating agency, the war in Iran and its impact on energy prices “constitutes a challenge for Cyprus, affecting growth, inflation and its external balances”. “Cyprus is more exposed than other EU countries given its geographical location and energy matrix, but for now we believe the impact on credit metrics will be moderate and temporary”, it said, adding that this is supported by accelerated economic diversification, solid macro fundamentals and much-improved public and private balance sheets in recent years. It notes, however, that an escalation or prolongation of the conflict could lead to higher risks, particularly if it weighs more heavily on tourism, trade and investment.
As regards growth, it said that following a strong performance in 2025 (3.8%) they forecast GDP growth will slow to an average of 2.6% in 2026-2027, below medium-term growth potential (3%) but similar to the 'A' median of 2.4%. “We expect private consumption to weaken as inflation rises and financing conditions tighten”, it said. Investment, it said, will be supported by the end stage of the Recovery and Resilience Framework and a large pipeline of private projects, but a more pronounced shift in sentiment poses a key downside risk. “Labour indicators have remained very strong, and we expect unemployment levels to remain low and stable over the forecast period”, it adds.
Sectoral Diversification: Services sectors, particularly tourism and real estate, remain vulnerable to shifts in external demand—March-April hotel booking figures already point to this—affecting output and potentially employment. However, Cyprus has seen a rapid rebalancing in the last decade from tourism toward higher value-added services (mainly IT), which now constitute the largest share in gross value added within the services category. This diversification enhances growth resilience and supports ongoing productivity gains.
Fitch expects harmonised inflation to increase to 3.9% in 2026 (from 0.8% in 2025) before moderating towards 2% thereafter, while noting that Cyprus' fiscal performance “continues to outperform eurozone and 'A' rated peers, supported by a strong commitment to sound public finances and favourable macro-backdrop”.
It also notes that public debt “is on a firm downward path”, having declined by almost 60pp of GDP in 2020-2025, “one of the sharpest declines of all rated sovereigns”.
According to the rating agency, Cyprus’ current account deficit (CAD) improved to 6.4% of GDP in 2025, “(still the highest in the eurozone), thanks to strong performance in services exports” noting that they expect the CAD will widen modestly in 2026-2027 as the trade deficit widens and tourism exports are affected by the Middle East war. Reliance on large volumes of capital flows in the context of geopolitical and security risks, and potential shifts in investor sentiment highlight a persistent vulnerability, it said.
Fitch also notes that Cyprus’ banking sector “has seen a stark recovery from its banking crisis over a decade ago, with legacy challenges largely addressed”. The system has robust solvency, liquidity and profitability, with lending picking up in 2025, it said, adding that the common equity Tier 1 ratio stood at 25.8% in December 2025, “the highest in the EU, providing banks with large buffers in the event of a cyclical downturn”. The non-performing loans ratio continues to fall, reaching 1.6% at end 2025 according to the Central Bank of Cyprus (from a peak of close to 45% in 2015), it said.
(Source: CNA)
