Fitch Affirms Cyprus at “A-” With Positive Outlook Amid Strong Fiscal Performance and Economic Resilience

The credit rating agency Fitch Ratings reaffirmed Cyprus’s long-term foreign currency issuer default rating at “A-” with a positive outlook on Friday evening, citing the country’s strong fiscal performance, solid economic fundamentals, and the policy credibility stemming from its membership in the European Union and the Eurozone.

According to the American agency, Cyprus’s rating reflects “the level of per capital income above the ‘A’ average, the strong fiscal results and the credibility of the policy supported by the country's membership in the EU and the Eurozone.” At the same time, Fitch noted that these strengths are counterbalanced by “slightly weaker governance indicators compared to peers, external financial vulnerabilities and a context of regional political tensions related to the division of the island.”

The agency emphasized that the positive outlook is primarily driven by the country’s continuing debt deleveraging and favorable growth prospects, which are helping to strengthen both fiscal and external resilience.

Fitch also examined the potential risks facing the Cypriot economy from escalating geopolitical tensions in the Middle East, particularly the war involving Iran and its possible impact on global energy prices. The agency described the conflict as a challenge for Cyprus because it could influence economic growth, inflation, and the country’s external balance.

The report stated that Cyprus is more exposed than many other European Union member states due to “its geographical location and energy situation,” though Fitch currently believes the consequences for the country’s credit profile “will be moderate and temporary.”

According to the agency, this resilience is supported by “accelerating economic diversification, stable macroeconomic fundamentals, and much-improved public and private balance sheets in recent years.” Nevertheless, Fitch warned that a worsening or prolonged regional conflict could increase economic risks, especially if tourism, trade, and investment come under greater pressure.

Regarding economic growth, Fitch projected that after a particularly strong performance in 2025, when GDP growth is expected to reach 3.8%, economic expansion will moderate to an average of 2.6% during 2026 and 2027. Although this would remain below Cyprus’s estimated medium-term growth potential of 3%, it would still be broadly in line with the average growth rate of 2.4% recorded by countries holding an “A” rating.

The agency expects private consumption to weaken as inflationary pressures rise and financing conditions become tighter. However, investment activity is anticipated to remain supported by the final implementation phase of the Recovery and Resilience Fund as well as a pipeline of major private-sector projects. Fitch cautioned, however, that “a more pronounced shift in the overall climate is a key downside risk.”

Labor market conditions, meanwhile, continue to remain exceptionally strong. Fitch stated that employment indicators have stayed “very strong” and forecast that unemployment levels will “remain low and stable” throughout the period under review.

The report also highlighted Cyprus’s impressive fiscal performance, noting that the country continues to outperform both Eurozone peers and similarly rated “A” economies. Fitch attributed this performance to the government’s sustained commitment to prudent fiscal management and a supportive macroeconomic environment.

According to the agency, Cyprus recorded a budget surplus equal to 3.4% of GDP in 2025, which it described as “the highest in the EU.” Fitch expects the fiscal balance to remain robust, averaging 2.3% over the forecast period.

Government measures introduced to offset the effects of the Middle East conflict, including direct assistance to the tourism industry, have so far remained relatively limited at approximately 0.1% of GDP. By contrast, the tax reform implemented in 2025 is expected to have a more substantial fiscal impact amounting to 0.7% of GDP.

Fitch also commented on the political outlook ahead of Cyprus’s parliamentary elections scheduled for May 2026. While the agency acknowledged that the elections could contribute to “greater political fragmentation and a more demanding political context,” it stressed that the broad political consensus in favor of fiscal prudence makes any major shift in fiscal policy unlikely.

On public debt, Fitch noted that Cyprus’s debt trajectory continues to improve significantly. Public debt has fallen by nearly 60 percentage points of GDP between 2020 and 2025, marking one of the most substantial reductions among countries with comparable ratings.

Under its baseline assumptions of sustained primary surpluses and strong nominal economic growth, Fitch expects the general government debt-to-GDP ratio to decline further to approximately 45% by the end of 2027. This would place Cyprus well below the projected average debt ratio of 58.3% for countries carrying an “A” rating.

The agency underlined that debt reduction, combined with low interest costs — estimated at only 1.1% of GDP in 2025 — strengthens both debt financing conditions and long-term debt sustainability.

Fitch also outlined the factors that could potentially lead to either a downgrade or an upgrade of Cyprus’s credit rating in the future.

Among the risks that could trigger a downgrade, the agency identified any failure to continue reducing the general government debt-to-GDP ratio. This could occur, for example, through “significant fiscal easing or weaker nominal GDP growth,” which might ultimately result in the outlook being revised from positive to stable.

Another downside factor would be an external shock affecting the medium-term outlook for key sectors of the economy, particularly the services sector, thereby intensifying the country’s external vulnerabilities.

Conversely, Fitch stated that an upgrade could occur if confidence increases that the sharp reduction in public debt will be sustained over the medium term through continued strong primary surpluses.

The agency also noted that reduced exposure to external shocks could support a higher rating. This could result from “continued indications that large current account deficits (CADs) are financed from sources other than debt, the continued diversification of economic activity or increased resilience to geopolitical shocks.”

By fLEXI tEAM