Fitch Upgrades Cyprus to ‘A’ Rating, Citing Strong Public Finances and Falling Debt

Fitch Ratings has upgraded the Republic of Cyprus’s long-term issuer default ratings from ‘A-’ to ‘A’, while revising the outlook from positive to stable. The decision, announced on 6 November 2026, reflects the country’s sustained fiscal performance, rapid reduction in public debt and resilient economic growth, supported by an increasingly diversified economy.

The upgrade places Cyprus in the ‘A’ rating category and represents another improvement in the country’s credit standing following a series of positive rating actions over the preceding 18 months. Fitch considers the government’s fiscal position particularly strong compared with similarly rated countries, with substantial budget surpluses and a declining debt burden providing greater flexibility to respond to economic shocks.

A key factor behind the decision is the expected continuation of strong fiscal surpluses. Fitch forecasts that Cyprus will record a general government surplus of 3.2% of GDP in 2026, matching the level achieved in 2025 and remaining the highest in the euro area. The agency expects surpluses to average 2.9% of GDP in 2027 and 2028, supported by spending restraint, robust public revenues and favourable economic conditions.

Public debt is also expected to decline significantly. Fitch forecasts that government debt will fall to 46.3% of GDP in 2026, compared with 52.4% in 2025, before reaching 36.6% by 2028. This would represent a reduction of approximately 77 percentage points from the 2020 peak, placing Cyprus well below the current median debt ratio of 59.5% for countries rated ‘A’. The reduction is attributed primarily to high primary fiscal surpluses and strong nominal economic growth.

The decline in debt is also expected to limit the government's interest expenditure. Interest payments amounted to approximately 1.1% of GDP in 2025, with Fitch forecasting a gradual increase to 1.5% by 2028 as existing debt is refinanced at higher rates. Nevertheless, the agency considers the projected cost manageable, particularly in view of the country's lower debt levels and cash reserves, which stood at approximately 7.3% of GDP.

Economic growth provides further support for the improved rating. Fitch forecasts that Cyprus will achieve annual GDP growth of approximately 3% between 2026 and 2028, exceeding both the expected euro area average and the median for countries in the ‘A’ rating category. Domestic consumption and the continued performance of the services sector are expected to remain the main drivers. The agency also points to the increasing diversification of the economy and the contribution of investment and productivity improvements, particularly in information and communications technology.

Revised economic data indicate that Cyprus experienced stronger growth between 2022 and 2025 than previously estimated, averaging approximately 6.6% annually over the period. Fitch considers this evidence of the economy's ability to benefit from investment and the expansion of services activities. GDP per capita has also converged with the euro area average, while the agency estimates the country's potential growth rate at approximately 3%.

The labour market remains another source of economic resilience. Participation rates are at historically high levels, while unemployment is forecast to average approximately 3.8% over the 2026–2028 period. Low unemployment and continued employment growth are expected to support household income and domestic consumption.

Fitch also considers the Cypriot banking sector to be resilient, with strong capitalisation, liquidity and profitability. The Common Equity Tier 1 capital ratio stood at 25.5% in June 2026, the highest level in the European Union, providing banks with substantial capital buffers against a potential economic downturn. The non-performing loan ratio remained at 1.6% during the first half of 2026, compared with a peak of close to 45% in 2015. The improvement reflects the significant progress made in addressing legacy banking-sector problems.

Despite the positive assessment, Fitch identified several vulnerabilities that could affect Cyprus's economic and credit outlook. Inflationary pressures have increased, with harmonised inflation reaching 5.2% in September 2026, compared with 0.9% in February. The agency attributes this mainly to the country's dependence on imported fossil fuels and higher services prices. It forecasts average inflation of 4% for 2026, followed by a decline to 2.5% in 2027 and 2028, assuming lower energy costs.

External imbalances also remain a concern. Fitch expects the current account deficit to average 8.1% of GDP between 2026 and 2028, reflecting higher energy costs and a moderation in the strong growth of services exports recorded in previous years. Although foreign direct investment inflows are expected to finance the deficit, the agency warns that reliance on substantial external capital flows exposes the economy to changes in investor sentiment and geopolitical or security-related developments.

The country's low level of energy independence and exposure to regional political tensions, including those associated with the division of the island, also remain relevant risks. Fitch further notes that governance indicators are somewhat weaker than those of certain peer countries, partially offsetting Cyprus's strong fiscal and economic performance.

The agency has identified a sharp increase in the public-debt-to-GDP ratio, potentially resulting from prolonged fiscal loosening, as a factor that could lead to a negative rating action. An external shock that intensifies existing vulnerabilities and causes a prolonged slowdown in economic growth could also place pressure on the rating. Conversely, a structural reduction in the current account deficit, greater resilience to geopolitical shocks, and improvements in GDP per capita and governance indicators could support a future upgrade.

The Cypriot government welcomed the decision, describing it as confirmation of the country's improving fiscal and macroeconomic position and the credibility of its economic policy. The Ministry of Finance highlighted the rapid reduction in public debt, continued economic growth, low unemployment and the strengthening of the banking sector as important factors underpinning the upgrade.

The improved rating strengthens Cyprus's standing in international financial markets and may support more favourable financing conditions for the government and domestic borrowers over time. A higher sovereign rating can also contribute to investor confidence and influence the assessment of the country's financial institutions and businesses. However, the extent to which these benefits materialise will depend on broader market conditions and the continued performance of the economy.

Fitch's decision therefore reflects substantial progress in public finances and economic resilience, while also emphasising the importance of maintaining fiscal discipline and addressing structural vulnerabilities. The ability to sustain budget surpluses, reduce external imbalances and preserve the competitiveness of the economy will remain important factors in determining Cyprus's future credit profile.

By fLEXI tEAM