Standard & Poor’s has affirmed Cyprus’s sovereign credit ratings at A-/A-2, maintaining a positive outlook.
In a statement, the agency said the outlook reflects its view that Cyprus’ external performance could exceed expectations over the next two years, driven by a faster reduction in external leverage, even amid uncertainty stemming from the ongoing conflict in the Middle East.
S&P noted that, given the country’s continued external and fiscal deleveraging alongside solid economic growth, the Cypriot economy is expected to withstand the impact of the current regional conflict.
However, it warned of potential effects including a temporary slowdown in growth—particularly in tourism and shipping—higher inflation due to rising energy prices, and a widening current account deficit this year, reflecting Cyprus’s reliance on energy imports. The scale of these impacts will depend largely on the duration and intensity of the conflict.
Energy prices remain the main pressure point for the economy under the current geopolitical conditions, with Cyprus heavily dependent on oil imports and already facing some of the highest energy costs in the EU.
Growth forecasts
S&P forecasts that the Cypriot economy will grow by around 2.8% in 2026 despite regional tensions, with domestic demand expected to become the main driver of growth. Private consumption is set to benefit from higher real wages, while private investment will be supported by public investment funded through the EU’s NextGenerationEU programme.
Net public debt is projected to continue declining sharply in the coming years, falling to 32% of GDP by 2029 from 96% in 2020, supported by sustained fiscal surpluses driven by strong economic performance and a robust labour market.
At the same time, Cyprus’s external debt is expected to keep decreasing, supported by strong services exports and foreign direct investment inflows exceeding primary income outflows.
Strong medium-term outlook
Despite the Middle East conflict, S&P expects Cyprus to maintain solid growth in the coming years, projecting average real GDP growth of 2.8% between 2026 and 2029, underpinned by strong domestic demand.
A healthy labour market—characterised by high employment and rising real wages—is expected to support private consumption, providing a buffer against potential secondary effects from regional instability, which could affect key sectors such as tourism and shipping, as well as oil prices. At present, however, the agency views such risks as largely short term.
Resilience to external shocks
The agency highlighted that Cyprus’s economy has so far proven resilient to the conflicts in Ukraine and the Middle East.
It noted that a significant number of companies—particularly in the ICT sector—have relocated to Cyprus from these regions. While such relocations, along with a strong tourism sector, have supported recent economic growth, this momentum is expected to moderate as tourism approaches capacity and large-scale ICT relocations become less likely.
S&P also assessed Cyprus’s direct exposure to shifting US trade policies and tariffs as limited, given that only around 3% of its goods exports are destined for the United States. However, indirect risks could arise if growth slows among key European trading partners.
Fiscal strength and banking sector
The agency expects fiscal surpluses averaging above 3% of GDP through 2029, reducing general government net debt to just over 30% of GDP over the same period.
This deleveraging has been enabled by strong economic growth—averaging around 5% in real terms between 2022 and 2025—driven largely by a thriving services sector, particularly tourism and technology.
Cyprus’s banking sector has also strengthened significantly, having absorbed most credit losses from past balance sheet clean-ups. Banks are now reporting record profitability alongside strong capital and liquidity buffers.
Following years of loan sales, write-offs and recoveries, asset quality has improved markedly, with the sector’s average non-performing loan ratio falling to 3.2% in December 2025. Under the methodology of the European Banking Authority, which includes exposures to central banks and credit institutions, the ratio would be even lower, at around 1.6%—below the EU average.
Nevertheless, the stock of non-performing assets held by credit-acquiring companies remains high, accounting for over 40% of total private sector debt, although it continues to decline. Domestic credit also recorded growth in 2025 for the first time in years, rising by 2.5%.
Upgrade and downgrade scenarios
S&P said it could lower Cyprus’s ratings if the Middle East conflict results in a significant shock to the country’s economy, weakening growth, public finances and the banking sector.
Conversely, an upgrade could follow if Cyprus’s external debt position improves faster than expected, reflected in a sustained reduction in net external leverage, supported by continued strong growth and fiscal revenues, particularly in a scenario of easing regional tensions.
Despite current account deficits, the agency noted these are largely financed by net foreign direct investment inflows, supporting the ongoing reduction of external debt in recent years.