Cyprus keeps BBB+ rating with stable outlook but regional tensions pose risks

Credit rating agency Capital Intelligence Ratings on Monday affirmed Cyprus’ long-term foreign currency rating at BBB+ with a stable outlook, while also confirming the short-term rating at A2.

The agency said the ratings are supported by the continued strengthening of public finances, reflected in sustained budget surpluses, declining public debt and low fiscal risks in the short to medium term.

“This is reflected in sustained budget surpluses, declining public debt and low fiscal risks in the short to medium term,” the agency said.

It added that active public debt management has reduced refinancing pressures, while significant state cash reserves provide a strong buffer against short-term shocks.

The ratings also reflect the ongoing reduction of contingent liabilities linked to the banking sector, supported by declining macroeconomic imbalances and improved financial system resilience.

At the same time, Cyprus’ economic performance remains robust, with growth among the strongest in the eurozone.

The agency highlighted that the economy benefits from high GDP per capita, strong foreign direct investment inflows and a diversified services-based model, particularly in tourism, business services, shipping and information and communication technologies.

It also pointed to institutional and financial support from EU and eurozone membership, including access to Recovery and Resilience Facility funding, as a key supporting factor.

However, the ratings are constrained by significant external imbalances and structural challenges, including large current account deficits, high external debt and elevated external financing needs.

Additional pressures stem from the still sizeable stock of non-performing loans held by credit-acquiring companies, as well as structural challenges in the labour market and productivity.

Medium- to long-term fiscal pressures linked to the national health system and population ageing were also cited as limiting factors.

The agency further warned that rising geopolitical risks, particularly linked to tensions involving the United States, Israel and Iran, weigh on the outlook.

Turning to public finances, the report found that Cyprus’ fiscal position remains strong, citing data from the Ministry of Finance.

Public debt declined to 55.3 per cent of GDP in December 2025, down from 62.8 per cent a year earlier.

“Debt dynamics were supported by a very strong general government surplus of 2.6 per cent of GDP in 2025, combined with strong economic activity,” the agency said.

Central government debt, including social security fund holdings, fell to 92.2 per cent of GDP, compared with 98.1 per cent in December 2024.

The agency expects further reductions in public debt to 51 per cent of GDP in 2026 and 45.7 per cent in 2027, supported by average budget surpluses of 3.1 per cent over the period.

It also noted that tax reform implemented in January 2026, including an increase in corporate tax to 15 per cent, is expected to moderately boost revenues while aligning Cyprus with global minimum tax standards.

Refinancing risks are seen as declining due to prudent fiscal management, favourable debt maturity structures and low gross financing needs, estimated at 3.8 per cent of GDP in 2026.

Debt maturities are projected at around 6 per cent of GDP, while government cash reserves are sufficient to cover roughly 200 per cent of gross financing needs for at least the next 12 months.

The agency also highlighted Cyprus’ return to international markets in January 2026, issuing a €1 billion 10-year bond expected to cover around 70 per cent of annual financing needs.

The outlook for public finances is described as balanced, although risks could emerge if fiscal discipline weakens or expenditure growth outpaces revenue increases, particularly in subsidies, social welfare and public sector wages.

“A potential slowdown in GDP could also limit tax revenues,” the agency said.

It added that risks also stem from prolonged regional uncertainty and contingent liabilities, including state-guaranteed debt and rising healthcare costs.

Contingent liabilities were estimated at 9.7 per cent of GDP in 2024, according to Ministry of Finance data.

The report also addressed geopolitical risks, noting that the escalation of tensions involving the United States, Israel and Iran poses increasing challenges for Cyprus due to its geographic proximity to the Middle East.

While direct impacts remain limited so far, the agency pointed to security incidents linked to British military bases on the island as evidence of exposure to regional instability.

“Increased geopolitical uncertainty has already begun to negatively affect tourism demand, while disruptions in global energy markets and Gulf shipping routes are raising import costs,” the agency said.

It warned that a prolonged escalation could lead to lower tourist flows, higher inflation and greater volatility in maritime and air transport in the eastern Mediterranean.

In a more severe scenario, Cyprus could face capital outflows and a reduction in foreign labour, with negative implications for economic activity and public finances.

However, the agency’s baseline scenario assumes that hostilities will not extend beyond April 2026 and that the overall impact will remain limited.

The banking sector continues to show improvement, with risks declining further and capital levels remaining strong.

The size of the sector fell to 186.1 per cent of GDP in September 2025, from 188.7 per cent in 2024.

Non-performing loans declined to 4.5 per cent of total loans, compared with 6.2 per cent in December 2024, while provision coverage rose to 68.5 per cent.

“Banks remain well capitalised, with an average CET1 ratio of 27.4 per cent, the highest in the EU,” the agency said.

Liquidity and profitability indicators were also described as satisfactory.

Private sector debt has also fallen significantly, reaching 167.2 per cent of GDP in September 2025, down from 341 per cent in 2013.

Excluding special purpose entities, private debt stood at 121.8 per cent of GDP, closer to the eurozone average.

However, the agency cautioned that non-performing assets held outside the banking system remain high, with loans managed by credit-acquiring companies reaching €19.7 billion, or 54.1 per cent of GDP, in June 2025.

“Economic growth remains strong, with real GDP increasing by 3.8 per cent in 2025,” the agency said.

Growth was driven by activity in hospitality, construction, wholesale and retail trade and information and communication technologies.

The agency expects GDP growth to average 3 per cent in 2026 and 2027, supported by domestic demand, investment and services exports.

GDP per capita reached €36,686 in 2025, while unemployment declined to 4 per cent.

Cyprus’ external position remains moderate due to large current account deficits and high external debt, although both have shown some improvement.

The current account deficit is estimated to have narrowed to 7.9 per cent of GDP in 2025, while external debt excluding special purpose entities fell to 164.2 per cent of GDP.

The stable outlook indicates that ratings are likely to remain unchanged over the next 12 months, balancing improved fiscal metrics and economic resilience against external vulnerabilities and geopolitical uncertainty.

The agency said an upgrade could follow further fiscal improvement, reduced external imbalances and continued private sector deleveraging, alongside structural reforms.

Conversely, a downgrade could occur if public finances deteriorate, debt increases or external shocks undermine fiscal stability.