Fitch Revises Cyprus’s Outlook to Positive; Affirms at ‘A-‘

Fitch Ratings has revised the Outlook on Cyprus’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at ‘A-‘.

Key Rating Drivers
The revision of the Outlook on Cyprus’s IDRs reflects the following key rating drivers and their relative weights:

High

Public Debt Deleveraging: Rapid general government debt reduction continues, underpinned by high primary surpluses and solid nominal GDP growth. We forecast debt/GDP to reach 55.4% at end-2025 (from 63% in 2024 and versus the A median of 58.1%), and 45.5% in 2027. This would represent an almost 70pp decline in debt since its peak in 2020, one of the fastest reductions among Fitch-rated sovereigns. Gradual debt repayment of concessional European Stability Mechanism debt will lead to a modest increase in interest costs. However, with debt projected to come down to around 40% of GDP over the medium term, debt-financing needs will remain low.

Large Budget Surpluses: Fitch projects average fiscal surpluses of 3.2% of GDP in 2025-2027 (primary surpluses at 4.5%), versus the ‘A’ median deficit of 3%. This continued outperformance reflects strong revenue growth and expenditure restraint. In recent years the strong labour market and diversified sectoral growth have helped boost revenue, a trend we expect to continue at a more gradual pace. The authorities are approving comprehensive tax reforms to ease the tax burden on individuals but offsetting the costs with higher corporate taxes. Spending in the coming years will be boosted by investment outlays to address long-standing infrastructure gaps.

Strong Fiscal Record: Cyprus has established a strong record of fiscal prudence in recent years, supported by broad political and societal consensus around sound fiscal policies. We see mounting expenditure pressures as for other countries in the region, but this has yet to translate to weakening fiscal commitments, emphasising the highly credible policy stance. The authorities intend to use the favourable fiscal and macro outlook to tackle some long-standing imbalances (including addressing intra-governmental debt) to increase fiscal resilience.

Medium

Strong Growth Outlook: We forecast GDP growth at 3.4% this year, before decelerating modestly to 3.1% in 2026-2027. This is well above eurozone growth (1%), helping to accelerate income convergence. Cyprus is already back to the EU per capita average in purchasing power terms. All sectors of the economy are expanding, mainly driven by information communication technology and other services, but also manufacturing and construction. Public investment, tied to Recovery and Resilience Funds and large private projects, should help maintain investment momentum.

Medium-term growth projections remain positive, ranging from 2.5% to 3.5%, supported by increased productivity and continued flows of foreign labour into high value-added sectors. The effect of tariffs and global fragmentation has been very modest so far, while risks around regional geopolitical developments remain contained. Some challenges, such as population ageing, persist, while increased reliance on services sectors growth increases vulnerability to external developments.

Favourable Macro Backdrop: Labour indicators point to a very solid employment picture, which supports fiscal and macro outturns. Unemployment is back to pre-2009 levels, while participation rates are around 80% (highest on record and among the highest in Europe). Labour tightness persists, but wage pressures remained contained and should stabilise, reducing risks to competitiveness. Harmonised inflation was only 1% in January-October, among the lowest rates in Europe.

Cyprus’ ‘A-‘ IDRs also reflect the following key rating drivers:

Fundamental Rating Drivers: Cyprus’s ratings reflect income per capita levels above the ‘A’ median, 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.

Large Current Account Deficit: Cyprus has a structurally large current account deficit (CAD), among the highest in the eurozone, reflecting a persistent trade deficit and rising primary income deficit tied to growing foreign direct investment, mainly in services sectors. We forecast the CAD will remain broadly stable at around 8% of GDP in 2025-2027, which will be more than financed by net foreign direct investment flows. Nevertheless, reliance on large volumes of capital flows in the context of geopolitical and security risks, and potential shifts in investor sentiment highlights a persistent vulnerability.

Improving Banking Sector: The banking sector has robust solvency, liquidity and profitability, supported by favourable macro indicators and growing lending activity. The common equity Tier 1 ratio was 26.3% in June 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 5.6% in June (from 6.2% at end-2024) according to the Central Bank of Cyprus. Banking sector consolidation will provide more impetus to non-performing loan sales.

Strong denominator effects and legacy effects of the financial crisis means private sector indebtedness continues to decrease as a share of GDP to below pre-crisis levels (and is now close to the eurozone average, once the data are adjusted for the impact of non-financial special purpose entities’ debt).

ESG – Governance: Cyprus has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Cyprus has a high WBGI ranking at the 71st percentile, reflecting its long record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and moderately low levels of corruption.

RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Public Finance: Failure to reduce general government debt/GDP, for example, due to structural fiscal loosening, which could lead to a revision of the Outlook to Stable

Macro/External: An external shock that heightens external vulnerabilities and negatively affects economic growth

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Public Finance: Increased confidence that the marked decline in general government debt/GDP will be sustained over the medium term, driven by substantial primary surplus

External Finances/Macro: Reduced vulnerability to external shocks, for example due to continued evidence that large CADs are financed by non-debt financing flows and continued diversification of economic activity

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch’s proprietary SRM assigns Cyprus a score equivalent to a rating of ‘A’ on the Long-Term Foreign Currency (LT FC) IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM score to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

– External Finances: -1 notch, to reflect the vulnerability of the economy to adverse external and terms of trade shock, in particular given a large CAD (driven by large primary income flows) and large external liabilities of the private sector (reflected in a large negative international investment position)

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Debt Instruments: Key Rating Drivers
Senior Unsecured Debt Equalised: The senior unsecured long-term debt ratings are equalised with the applicable Long-Term IDR, as Fitch assumes recoveries will be ‘average’ when the sovereign’s Long-Term IDR is ‘BB-‘ and above. No Recovery Ratings are assigned at this rating level.

Country Ceiling
The Country Ceiling for Cyprus is ‘AAA’, six notches above the LT FC IDR. This reflects very strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch’s Country Ceiling Model produced a starting point uplift of +3 notches above the IDR. Fitch’s rating committee applied a further +3 notches qualitative adjustment to this, under the LT Institutional Characteristics pillar, reflecting the sovereign’s membership of the eurozone currency union and the associated reserve currency status. Fitch views the risk of imposition of capital or exchange controls within the eurozone as exceptionally low, but not negligible.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

Climate Vulnerability Signals
The results of our Climate.VS screener did not indicate an elevated risk for Cyprus.

ESG Considerations
Cyprus has an ESG Relevance Score of ‘5[+]’ for Political Stability and Rights as WBGI have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Cyprus has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Cyprus has an ESG Relevance Score of ‘5[+]’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Cyprus has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Cyprus has an ESG Relevance Score of ‘4[+]’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Cyprus has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Cyprus has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Cyprus, as for all sovereigns. As Cyprus has a fairly recent restructuring of public debt in 2013, this has a negative impact on the credit profile.

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.