Nicosia:Fitch Ratings has upgraded Cyprus's Long-Term Issuer Default Ratings (IDRs) to 'A' from 'A-', reflecting stable outlooks for the country's fiscal and macroeconomic performance.
According to Cyprus News Agency, the upgrade is attributed to Cyprus's solid fiscal performance, characterized by rapidly declining government debt and large fiscal surpluses, which are significantly stronger compared to its peers. The country's strong macroeconomic performance is supported by increased diversification.
Cyprus's ratings benefit from having an income per capita above the 'A' median, strong fiscal outcomes, and policy credibility backed by EU and eurozone membership. However, these strengths are counterbalanced by slightly weaker governance indicators than peers, vulnerabilities in external finances, and regional political tensions due to the island's division.
Fitch highlighted fiscal outperformance, general government debt, and resilient growth as key rating drivers. They project a general government surplus of 3.2% of GDP in 2026, the highest in the eurozone, with surpluses expected to average 2.9% in 2027-2028.
The agency expects general government debt to decrease rapidly to 46.3% of GDP in 2026 and further to 36.6% in 2028, indicating a sharp decline since 2020. This decrease is supported by high primary surpluses and strong nominal growth, with debt falling below the 'A' median of 59.5% of GDP.
Fitch forecasts GDP growth to be 3% from 2026 to 2028, driven by strong domestic consumption and services sectors. The labor market remains solid, with low unemployment rates supporting private consumption.
Inflation pressures and external vulnerabilities, such as a large current account deficit and low energy independence, present medium-term challenges. However, tourism inflows have recovered, mitigating some economic risks.
The banking sector in Cyprus remains resilient, with robust solvency, liquidity, and profitability, as evidenced by a high common equity Tier 1 ratio and a low non-performing loans ratio.
Fitch warns that factors like a sharp increase in government debt or an external shock could lead to negative rating actions or downgrades.