Cyprus has formally joined the "A" category of countries with high creditworthiness, after S&P Global Ratings upgraded the Republic to "A/A-1" from "A-/A-2" and kept its outlook open to a further upgrade. The decision reflects the dramatic adjustment the economy has undergone over the past decade and effectively confirms its full recovery from the 2013 banking crisis. The picture S&P paints is of an economy that has left the fiscal and banking crisis behind and now has significant buffers against new shocks. The economy grew by an average of around 5% in 2022–2025, and S&P forecasts growth of 2.7% in 2026 and an average of 2.9% over 2026–2029. Net public debt is projected to fall from 49.1% of GDP in 2025 to 31.1% in 2029.
Behind the positive picture, however, some weaknesses persist. The Cypriot economy remains small and highly open, with heavy reliance on services, tourism, foreign investment inflows and energy imports. The agency notes that despite the improvement in its external position, Cyprus remains more vulnerable than other countries because of persistently high current account deficits, its dependence on energy imports and its heavy exposure to tourism and foreign investment.
Sustaining surpluses under pressure
The biggest challenge in the coming years will be sustaining fiscal surpluses in an increasingly difficult environment. S&P forecasts a surplus of 2.4% of GDP in 2026 and an average of just under 3% over 2026–2029. The performance has rested on strong growth, rising tax revenue and restrained spending. The question is how easily this fiscal discipline can be maintained as the economy faces a new wave of inflation. Inflation is expected to reach 3.8% in 2026, a forecast that does not take into account the current surge in energy prices, and S&P expects it to stay above the European Central Bank's 2% target in 2027. Rising energy prices, geopolitical tensions and pressure on food and service prices are increasing the need for measures to support households.
The government must keep producing surpluses at a time of growing pressure for measures to reduce the cost of living. Reduced VAT rates on electricity and lower excise duty on motor fuel have already been introduced, without so far upsetting the fiscal picture. However, S&P notes that the cost-of-living allowance (CoLA) in the public sector makes public finances more sensitive to inflationary pressure. The Fiscal Council also highlighted the burden CoLA places on the already high state wage bill in its interim report for 2026.
Non-performing loans still weigh
The recovery of the banking system is one of the biggest successes of post-bailout Cyprus. The agency says Cypriot banks have absorbed most of the credit losses linked to cleaning up their balance sheets and show resilient profitability, along with strong capital and liquidity buffers. After years of large sales of non-performing loans (NPLs), write-offs and recoveries, asset quality in the banking sector has improved significantly. The sector's average NPL ratio continued to fall, reaching 1.6% in December 2025, below the European average. The NPL problem has not gone away, however, and it remains a burden on the economy that holds back growth. "About 40% of total private sector debt is still non-performing and held mainly by credit acquiring companies, although stocks continue to decline," S&P said. This matters because the banking system has largely shed the NPL burden, but that does not mean the economy has eliminated the problem. Effective management of the loans held by credit acquiring companies therefore remains one of the main open fronts for the Cypriot economy.
Energy and the external balance
Energy dependence remains among the economy's main weaknesses. Cyprus still relies heavily on oil imports to generate electricity, leaving it highly exposed to international energy prices. S&P considers the completion of the LNG terminal at Vasilikos critical, but notes that its timeline remains uncertain, while the Great Sea Interconnector electricity cable project remains stalled. The other major concern is the current account. The deficit is expected to widen to 8.7% of GDP in 2026, mainly because of the war in the Middle East and higher energy costs. S&P also notes that the income of Cyprus residents, as measured by gross national income, is around 10%–11% lower than GDP suggests, because of the large presence of foreign investment.
