The escalating crisis in the Middle East has begun to draw the attention of international credit rating agencies assessing potential risks for the Cypriot economy.
Initial assessments suggest that the scale of any economic impact will largely depend on how long the conflict lasts. At the same time, analysts say Cyprus’s strong fiscal position could help absorb possible shocks.
Senior analysts from Fitch Ratings and Morningstar DBRS, speaking to Politis, said that while higher inflation in the eurozone may emerge as a consequence of the crisis, it is unlikely to significantly slow economic growth in Cyprus. However, they warned that a prolonged regional conflict could have substantial consequences for sectors such as tourism and investment.
Increased uncertainty among consumers and investors could also weigh on economic activity.
Inflation risks but growth expected to hold
Federico Barriga, global head of sovereign ratings at Fitch Ratings, told Politis that Cyprus faces both general and potential domestic effects from the Middle East conflict.
“The common risk is higher inflation in the eurozone, which could moderately affect growth across the region,” he said.
Barriga noted, however, that economic growth in Cyprus has partially decoupled from broader eurozone trends over the past two years. As a result, this risk alone is unlikely to translate into significantly lower growth for the Cypriot economy.
The impact could become more pronounced if military activity continues near Cyprus or directly affects the country, he added. In that case, the scale of the economic consequences would depend on the extent and persistence of the security risks.
According to Barriga, potential transmission channels include changes in tourism flows, reduced investment in the services sector – which has been a key driver of recent growth – and a broader increase in uncertainty among consumers and investors.
Fitch currently expects Cyprus’s current account deficit to remain broadly stable at around 8 percent of GDP between 2025 and 2027, financed largely through net inflows of foreign direct investment.
However, Barriga cautioned that reliance on large capital inflows, particularly amid heightened geopolitical and security risks, highlights a persistent external vulnerability for the economy.
Tourism among the most exposed sectors
Yesenn El-Radhi, senior vice president in the Global Sovereign Ratings group at Morningstar DBRS, said that a prolonged period of regional instability in the Middle East would pose a risk to Cyprus’s economic outlook.
This would be particularly significant for tourism, given the island’s geographic proximity to the region.
“If tensions in the Middle East remain elevated in the coming months, this could reduce tourist arrivals during the peak summer season and therefore weaken economic growth momentum,” he said.
Tourism arrivals have been one of the main drivers of Cyprus’s economic expansion in recent years.
El-Radhi also noted that, like other energy-importing countries, Cyprus could face negative effects if energy import prices remain high for a prolonged period.
“A sustained increase in energy prices would likely weaken household purchasing power,” he said.
At the same time, he emphasised that Cyprus is currently in a strong fiscal position to withstand an external shock.
“Fiscal balances have recorded significant structural surpluses in recent years. Public debt has also declined substantially, while government cash reserves remain large,” he said.
Limited exposure for banks
As for the banking sector, Pau Labro, director in the Financial Institutions division at Fitch, said that no significant direct impact on Cypriot banks is expected.
However, he noted that banks may need to increase their credit provisions if economic conditions deteriorate.
“Greater uncertainty, potentially higher inflation and weaker growth could negatively affect business activity. Banks may also need to increase credit provisions to reflect higher macroeconomic risks,” Labro said.
Direct exposure of Cypriot banks to loans in the Middle East remains limited. According to Fitch, the country’s largest banks are well positioned to absorb potential shocks thanks to strong capital buffers, ample liquidity and solid balance sheet quality.
Another factor to watch is the monetary policy of the European Central Bank, as Cypriot banks’ net interest income tends to respond positively to higher interest rates.
Energy dependence increases vulnerability
Cyprus and Greece are among the European economies most sensitive to a prolonged rise in oil and gas prices, according to a recent analysis by Scope Ratings examining the credit implications of the Middle East conflict.
Both countries rely heavily on fossil fuels in their energy mix, making them more vulnerable to sustained increases in global energy prices.
Rating decisions approaching
The next test for the Cypriot economy will come on Friday, March 13, when Morningstar DBRS is expected to issue its latest rating decision. A week later, Standard & Poor’s will follow with its own assessment.
In September 2025, DBRS upgraded the Republic of Cyprus’s long-term foreign and local currency rating from A (low) to A, while revising the outlook from positive to stable.
The agency cited the sharp reduction in public debt in recent years and expectations that debt ratios will continue to improve.
Further upgrades could occur if sustained economic growth and strong fiscal performance lead to additional reductions in public debt and signs of increased economic resilience and labour productivity.
Conversely, ratings could come under pressure if the trajectory of public debt deteriorates significantly, potentially due to a prolonged period of weak growth or rising fiscal pressures. Large contingent liabilities, particularly from the domestic banking sector, could also weigh on the outlook.
In December 2025, Fitch revised Cyprus’s outlook to positive from stable, while affirming its long-term issuer default rating at A-.
Duration of the crisis remains key
Ultimately, the duration of the geopolitical crisis and the associated energy disruption will determine the credit impact, according to a recent note by Moody’s on global geopolitical risk linked to the Middle East conflict.
Moody’s baseline scenario assumes the conflict will be relatively short-lived, potentially lasting only weeks.
However, the agency warned that a prolonged disruption to oil supply would significantly increase credit risk and broaden the economic impact of the crisis.