Morningstar DBRS has changed the trend on the Republic of Cyprus’ long-term and short-term credit ratings from Stable to Positive, while confirming the ratings at “A” and R-1 (low) respectively, citing the country’s strong fiscal performance, continued reduction in public debt and resilient economic growth.
“The Positive trend reflects Morningstar DBRS' view that Cyprus will maintain its strong fiscal position and continue reducing its public debt burden”, it is noted.
According to Morningstar DBRS, the general government debt-to-GDP ratio is expected to decline from 49.9% in 2026 to below 40% by 2029, supported by favourable growth prospects and sizeable structural fiscal surpluses.
The agency expects private consumption, investment and continued strength in tourism and non-tourism service exports to underpin economic activity. Following growth of 3.8% in 2025, the Central Bank of Cyprus expects real GDP growth of around 3% annually over the forecast period. Although the war in Iran has affected tourism and contributed to imported inflationary pressures, Morningstar DBRS considers the impact on the Cypriot economy to have been more limited than initially anticipated.
Fiscal position key to the positive assessment
A central element of the assessment is Cyprus’ fiscal performance, which Morningstar DBRS describes as stronger than that of EU peers, despite support measures and tax reform.
The headline fiscal surplus reached 3.4% of GDP in 2025, compared with 4.1% in 2024. Public revenues increased significantly compared with 2019, reaching €15.9 billion, or 43.6% of GDP, in 2025. The rating agency attributes the stronger revenue performance partly to the widening of the corporate tax base, strong employment and wage growth and higher social security contributions and personal income tax receipts.
For 2026, the Ministry of Finance expects the surplus to narrow to 2.3% of GDP, partly because of measures to mitigate the effects of the Middle East war, the impact of last year’s tax reform and costs associated with the agreement between KEDIPES and Hellenic Bank. However, the surplus is expected to recover from 2027, averaging 3.1% of GDP during 2027-2029 and reaching 3.6% in 2029.
Public debt is another major factor behind the positive outlook. General government debt fell to 55% of GDP in 2025 from 96.5% in 2021, with the Ministry of Finance expecting it to fall below 50% by the end of 2026. Morningstar DBRS says large primary surpluses and strong nominal GDP growth have been the main drivers of the decline.
What could lead to an upgrade or reversal
Morningstar DBRS identifies two main developments that could lead to an upgrade: a decline in the public debt ratio broadly in line with current expectations, and evidence of greater economic resilience accompanied by higher labour productivity.
“Morningstar DBRS could change the trends on the credit ratings back to Stable if the economic performance proves less resilient to external shocks and the projected decline in public debt ratio materially underperforms our expectations”, it says.
Conversely, the Positive trend could be changed back to Stable if Cyprus proves less resilient to external shocks or if the projected decline in public debt materially underperforms expectations. A downgrade could be considered in the event of a significant deterioration in the public debt trajectory or a structural change that weakens the country’s growth prospects.
The agency nevertheless identifies vulnerabilities. Cyprus’ economy remains relatively small and heavily service-oriented, while labour productivity remains below the EU average. GDP per person employed stood at 92.2% of the EU average in 2025, with Morningstar DBRS noting that the prominence of labour-intensive activities such as tourism contributes to the gap.
The banking sector is considered significantly stronger, with a CET1 capital ratio of 25.1% in March 2026, while non-performing exposures had fallen to 1.6%, from 17.9% in 2019.
Stable political environment
The credit ratings are also supported by Cyprus’ stable political environment. Pit is noted that parliamentary elections took place in May 2026 and resulted in a more fragmented legislature, but, under Cyprus’ presidential system, the elections did not determine the government and are therefore unlikely to lead to major policy changes regarding fiscal policy and the reforms embedded in Cyprus’ recovery plan
In terms of institutional quality, however, the country’s ranking in the Worldwide Governance Indicators, including Control of Corruption and Rule of Law, has deteriorated in recent years and is now below the EU average, while Cyprus’ EU membership remains an important anchor for institutional quality.
Regarding the UN-supported reunification talks, Morningstar DBRS currently assumes that the chances of a significant breakthrough remain limited.
Source: CNA
