Fitch Affirms Cyprus’ ‘A-’ Rating with Stable Outlook Amid Strong Fiscal Performance and Geopolitical Headwinds

International credit rating agency Fitch has affirmed Cyprus’ long-term foreign currency rating at ‘A-’ with a stable outlook, citing a combination of robust fiscal indicators, declining public debt, and resilient economic growth. The decision underscores Cyprus' macroeconomic stability even as the country navigates complex external vulnerabilities and mounting geopolitical tensions.

According to Fitch, the affirmation reflects a higher per capita income than the average within the ‘A’ rating category and the credibility of the country’s policy framework, bolstered by its European Union and eurozone membership. However, these advantages are balanced by persistent weaknesses in governance indicators, considerable external imbalances, and the continued political division of the island.

Cyprus’ fiscal metrics for 2024 outperformed many of its regional peers, with a primary fiscal surplus of 4.3% of GDP, well above the ‘A’ category average deficit of 2.8%. The surplus climbed even higher to 5.6%—the strongest in nearly two decades—thanks to elevated government revenues and disciplined expenditure management. Public debt also continued its downward trajectory, falling from 73.6% of GDP in 2023 to 65.3% by the end of 2024. Projections indicate a continued reduction, with debt expected to drop to 52.6% in 2026 and potentially nearing 45% before the decade concludes.

Looking ahead, Fitch projects a slight tapering in the fiscal surplus, forecasting 3.4% in 2025 and 3% in 2026. This moderation is attributed to increased public investment and a deceleration in nominal economic growth. Nonetheless, these figures are still considered healthy and indicative of continued fiscal prudence. The report also noted that Cyprus’ status outside NATO alleviates some pressure to ramp up defense spending, though it acknowledged ongoing fiscal challenges, particularly those related to infrastructure development and demographic shifts tied to an aging population.

Economic growth remains steady, with Fitch expecting a 3% expansion in both 2025 and 2026—marginally below the 3.4% growth recorded in 2024. The growth outlook is driven largely by sustained momentum in the services sector and a resilient labor market. In 2024, employment increased by 2%, while unemployment dropped to 4.5%, approaching historic lows.

Despite these positive fundamentals, Fitch flagged Cyprus’ persistent current account deficit (CAD) as a key area of concern. The deficit stood at an estimated 6.9% of GDP in 2024 and is projected to remain elevated at around 7% for 2025–2026—among the highest in the European Union. However, the agency pointed out that this gap is being covered by robust foreign direct investment (FDI), which is now increasingly flowing into diversified sectors of the economy.

The banking sector continues to exhibit resilience, according to the agency’s findings. The Common Equity Tier 1 (CET1) capital ratio stands at an impressive 24.5%, the highest in the EU, while non-performing loans have been reduced to 6%, reflecting ongoing improvements in financial stability and risk management within the banking industry.

Fitch’s internal rating model initially assigned Cyprus an ‘A’ rating, which was then adjusted downward by one notch due to external vulnerabilities. These risks, which include geopolitical instability and trade disruptions, continue to weigh on the island’s long-term credit profile.

The agency noted that an upgrade could be considered in the event of further reductions in public debt or a meaningful improvement in the country’s external position. Conversely, any deterioration in fiscal discipline or exposure to adverse external shocks could prompt a downgrade.

Reacting to the rating, Cyprus’ Ministry of Finance issued a statement welcoming the decision as a validation of the country’s sound fiscal trajectory and promising economic outlook, despite global instability. “In an uncertain geopolitical environment and ongoing economic uncertainty stemming from recent developments in global trade, Fitch maintains the Republic of Cyprus at a high point, recognizing the very good economic performance of recent years as well as the very good prospects for the near future despite the enormous challenges presented both in the immediate (crisis in the Middle East, war in Ukraine) and the broader geopolitical environment (imposition of tariffs, disruption of international trade),” the Ministry said.

The Ministry emphasized that continuity in the current policy direction—anchored in fiscal discipline and prudent economic management—is crucial to unlocking future upgrades and further enhancing Cyprus’ economic competitiveness and stability. “The Government, faithful to its policies,” it continued, “strongly supports the economy in a responsible and flexible manner, both in terms of growth and employment, as well as public finances.”

“In view of the challenges that the Cypriot economy is called upon to face from developments in the international economic-political environment,” the statement concluded, “the Government will continue to implement those economic plans that allow for the maximum possible utilization of all the opportunities offered for continuous economic development, while simultaneously aiming at further reducing public debt.”

Fitch’s affirmation serves as a notable endorsement of Cyprus’ recent fiscal management, even as it underscores the importance of vigilance in a world increasingly defined by geopolitical uncertainty and economic volatility.

By fLEXI tEAM