Fitch Ratings has affirmed Cyprus's long-term foreign currency credit rating at A- with a positive outlook, citing strong fiscal performance and continued debt reduction, while flagging the country's elevated exposure to the conflict in the Middle East as a risk to watch.
The agency said Cyprus's ratings reflect above-average per capita income levels for the A category, strong fiscal results and policy credibility underpinned by EU and eurozone membership. These strengths are balanced against slightly weaker governance indicators compared to peers, external economic vulnerabilities and a framework of regional political tensions related to the island's division.
Fitch noted that the Iran war and its effect on energy prices poses a challenge for Cyprus, affecting growth, inflation and the external balance. Given its geographical position, Cyprus is more exposed than most EU member states, but the agency currently assesses the impact on credit metrics as moderate and temporary. This assessment is supported by the economy's accelerating diversification, solid macroeconomic fundamentals and significantly improved public and private sector balance sheets in recent years. Fitch cautioned, however, that an escalation or prolongation of the conflict could raise risks materially, particularly if it weighs further on tourism, trade and investment.
Growth slowing but unemployment stable
After a strong 2025 performance of 3.8% GDP growth, Fitch projects expansion will slow to an average of 2.6% in 2026 and 2027. Private consumption is expected to soften as inflation rises and financing conditions tighten. Investment will be supported by the final stages of the Recovery and Resilience Framework and a substantial pipeline of private projects, though a sharper shift in sentiment is identified as a key downside risk. Labour market indicators remain strong, with unemployment levels expected to stay low and stable throughout the forecast period.
Fitch noted that the services sectors, particularly tourism and real estate, remain exposed to swings in external demand, with hotel booking data for March and April already pointing in that direction. However, the agency highlighted Cyprus's rapid economic reorientation over the past decade away from tourism and towards higher-value-added services, primarily information technology, which now account for the largest share of gross value added within the services category. This diversification, Fitch said, strengthens growth resilience and supports continued productivity gains.
Inflation set to rise sharply
The agency forecasts harmonised inflation rising to 3.9% in 2026, up from 0.8% in 2025, before moderating towards 2% thereafter. High dependence on imported fossil fuels will drive up energy, food and other costs, though this will be partially offset by fuel tax reductions and other support measures. Wage pressures have been relatively contained in recent years, but cost-of-living indexation is likely to exert upward pressure and may sustain second-round price effects.
Cyprus's fiscal performance continues to outpace the eurozone and A-rated peers, supported by a strong commitment to sound public finances and a favourable macroeconomic backdrop. The fiscal surplus reached 3.4% of GDP in 2025, the highest in the EU, and is projected to average a solid 2.3% over the forecast period. Fiscal support measures introduced to cushion the impact of the Middle East war, including direct support to the tourism sector, have so far been modest, amounting to 0.1% of GDP. The 2025 tax reform is expected to have a more significant fiscal impact of 0.7% of GDP. Fitch noted that the May parliamentary elections could produce greater political fragmentation and a more demanding legislative environment, but said the broad cross-party consensus on fiscal discipline means no significant shift in fiscal policy is anticipated.
Public debt is on a firm downward path, having fallen by nearly 60 percentage points of GDP between 2020 and 2025, one of the steepest reductions among all rated sovereigns. The general government debt-to-GDP ratio is projected to fall to approximately 45% by end-2027, well below the projected A-category average of 58.3%.
Banking sector stabilised
Cyprus's banking sector has staged a marked recovery from its crisis of a decade ago, with the main challenges now largely addressed. The system displays strong solvency, liquidity and profitability, with loan growth resuming in 2025. The Common Equity Tier 1 ratio stood at 25.8% in December 2025, the highest in the EU, providing banks with substantial buffers against a cyclical downturn. The non-performing loan ratio has continued to fall, reaching 1.6% at end-2025, down from nearly 45% in 2015.
