Cyprus Economy Continues to Outpace Europe as Credit Rating Reviews Approach

Cyprus is continuing to record strong economic growth, with the country's performance remaining well ahead of the European average despite a more challenging external environment and increasing uncertainty across regional markets.

The latest figures indicate that real GDP expanded by 3.3% year-on-year in the second quarter of 2026, following growth of 3.0% in the first quarter. The second-quarter result was more than three times the growth recorded across the euro area, highlighting the continued resilience of the Cypriot economy.

The performance is particularly notable given the external pressures facing the economy during the year. Higher energy costs, geopolitical tensions in the wider region and weaker tourism activity have created additional challenges for Cyprus. Nevertheless, domestic economic activity has remained sufficiently strong to maintain a comparatively high rate of expansion.

The strength of the economy is also reflected in longer-term figures. Cyprus recorded real GDP growth of 3.8% in 2025, while the European Commission expects growth to remain above the EU average in 2026 and beyond. Its spring forecast projected real GDP growth of 2.3% for 2026 and 2.7% for 2027.

The latest quarterly performance therefore suggests that the Cypriot economy is continuing to demonstrate greater momentum than some earlier forecasts anticipated.

Services remain a central driver of economic activity. Tourism, information and communications technology, professional services and other internationally oriented activities continue to support growth, reinforcing Cyprus's position as a predominantly services-based economy.

The country's ability to attract international businesses and investment has also helped maintain economic activity. Technology, financial services, shipping, tourism and professional services remain important contributors to the domestic economy, while growing investment in sectors such as digital technology and energy is providing additional sources of activity.

The strong growth figures are emerging at an important moment for Cyprus because several international credit rating agencies are preparing to reassess the country's sovereign creditworthiness.

Three rating decisions are scheduled for September. DBRS Morningstar is expected to publish its assessment on September 4, followed by Standard & Poor's and Capital Intelligence Ratings on September 18. Fitch Ratings and Moody's are then expected to conduct their respective reviews in November.

The forthcoming assessments could be particularly significant because Cyprus has undergone a substantial improvement in its credit profile over recent years. The country has benefited from strong economic growth, fiscal surpluses, declining public debt and improvements in the resilience of its financial system.

Fitch currently rates Cyprus at A- with a positive outlook. The agency has nevertheless projected some moderation in economic growth, forecasting average GDP expansion of 2.6% during 2026 and 2027 following the country's strong 3.8% performance in 2025.

The difference between the latest economic performance and the forecasts illustrates one of the key issues facing analysts. While growth is expected to moderate over the medium term, Cyprus continues to outperform many of its European peers.

Fiscal developments are another important factor for the rating agencies. Cyprus has maintained substantial budget surpluses in recent years, allowing public debt to decline considerably from the levels recorded following the financial crisis and the pandemic.

The reduction in the debt burden has strengthened the government's financial position and provided greater room to respond to potential economic shocks. Strong fiscal performance has been repeatedly identified as one of the factors supporting Cyprus's improved credit standing.

The country's banking sector has also become significantly more resilient. Capitalisation and liquidity levels remain strong, while the volume of non-performing loans has fallen substantially compared with the period following the financial crisis.

These developments have helped reduce some of the financial-sector vulnerabilities that previously weighed heavily on Cyprus's sovereign credit profile.

At the same time, the economy continues to face risks. Cyprus remains a small and highly open economy, making it particularly sensitive to developments outside its borders. Geopolitical tensions in the Eastern Mediterranean and Middle East, fluctuations in energy prices, changes in tourism demand and conditions in major European markets could all affect future growth.

The tourism sector is particularly exposed to regional developments. Although Cyprus remains a major international tourist destination, changes in travel patterns and heightened geopolitical uncertainty can influence arrivals, spending and investment.

The economy's dependence on services and external demand also means that international financial conditions remain important. Higher borrowing costs, weaker demand in key export markets or renewed volatility in global financial markets could put pressure on growth.

Nevertheless, the current economic position provides Cyprus with a significantly stronger buffer than in previous periods of external stress.

The combination of sustained GDP growth, fiscal surpluses, falling public debt and a stronger banking system has substantially changed the country's economic profile over the past decade. The improvements have been reflected in a series of positive assessments and rating actions from international agencies.

The European Commission has similarly described Cyprus's economic outlook as favourable, with growth expected to remain above the EU average. Its assessment also points to continued improvements in the country's public finances and financial-sector resilience.

For businesses operating in Cyprus, the economic performance has broader implications. Continued growth supports domestic demand, employment and investment, while a stronger sovereign credit profile can contribute to improved financing conditions and investor confidence.

The country's attractiveness to international companies may also benefit from the combination of economic stability, access to the EU market and a growing services and technology sector. Stronger public finances can further reinforce perceptions of Cyprus as a stable jurisdiction for international business operations.

The upcoming rating reviews will therefore be closely watched by investors, financial institutions and businesses with exposure to the Cypriot economy.

A further improvement in Cyprus's credit standing could reinforce the progress achieved in recent years and potentially strengthen the country's financing position. Conversely, maintaining existing ratings would still represent a continuation of the country's relatively strong credit profile, particularly given the challenges facing the broader European economy.

For now, the latest growth figures provide a positive backdrop. Cyprus is expanding at a pace significantly above the European average, while maintaining fiscal discipline and continuing to reduce its debt burden.

The principal challenge will be maintaining this momentum as the economy moves beyond the exceptionally strong growth recorded in recent years. With external risks remaining elevated and international forecasts pointing towards some moderation, the country's ability to sustain growth while preserving its fiscal and financial stability will be central to the next stage of its economic development.

By fLEXI tEAM