Nicosia: Fitch Ratings affirmed Cyprus' long-term foreign-currency issuer default rating (IDR) at 'A-' with a Positive Outlook. Cyprus' ratings reflect income per capita levels above the 'A' median, strong fiscal outturns, and policy credibility supported by EU and eurozone membership. These strengths are balanced by slightly weaker governance indicators than peers, vulnerabilities in external finances, and a backdrop of regional political tensions related to the division of the island. The Positive Outlook is driven by continued debt deleveraging and favorable growth prospects that are increasing fiscal and external resilience.
According to Cyprus News Agency, resilience to external challenges is a concern, with the war in Iran and its impact on energy prices posing a challenge for Cyprus, affecting growth, inflation, and its external balances. Cyprus is more exposed than other EU countries given its geographical location and energy matrix. However, the impact on credit metrics is expected to be moderate and temporary, supported by accelerated economic diversification, solid macro fundamentals, and improved public and private balance sheets. An escalation or prolongation of the conflict could increase risks, particularly affecting tourism, trade, and investment.
In terms of growth, following a strong performance in 2025 (3.8%), GDP growth is forecasted to slow to an average of 2.6% in 2026-2027, below medium-term growth potential but similar to the 'A' median of 2.4%. Private consumption is expected to weaken as inflation rises and financing conditions tighten. Investment will be supported by the end stage of the Recovery and Resilience Framework and a large pipeline of private projects, though a shift in sentiment poses a downside risk. Labour indicators remain strong, with unemployment levels expected to remain low and stable over the forecast period.
In sectoral diversification, services sectors, particularly tourism and real estate, remain vulnerable to shifts in external demand, affecting output and potentially employment. However, Cyprus has seen rapid rebalancing from tourism toward higher value-added services, mainly IT, which now constitute the largest share in gross value added within the services category. This diversification enhances growth resilience and supports ongoing productivity gains.
Fitch expects harmonised inflation to increase to 3.9% in 2026 before moderating towards 2%, while Cyprus' fiscal performance continues to outperform eurozone and 'A' rated peers, supported by a strong commitment to sound public finances and a favorable macro-backdrop. Public debt is on a firm downward path, having declined sharply by almost 60 percentage points of GDP in 2020-2025.
Cyprus' current account deficit improved to 6.4% of GDP in 2025, thanks to strong performance in services exports. The CAD is expected to widen modestly in 2026-2027 as the trade deficit widens and tourism exports are affected by the Middle East war. Reliance on large volumes of capital flows in the context of geopolitical and security risks highlights a persistent vulnerability.
The banking sector has seen a significant recovery from its crisis over a decade ago, with legacy challenges largely addressed. The system has robust solvency, liquidity, and profitability, with lending picking up in 2025. The common equity Tier 1 ratio stood at 25.8% in December 2025, the highest in the EU, providing banks with large buffers in the event of a cyclical downturn. The non-performing loans ratio continues to fall, reaching 1.6% at the end of 2025, according to the Central Bank of Cyprus.