Rating action

Scope Ratings GmbH (Scope) has today upgraded the Republic of Cyprus’s (Cyprus) long-term local- and foreign-currency issuer and senior unsecured debt ratings to A from A-, and has revised the Outlooks to Stable from Positive. Scope has also affirmed Cyprus’s short-term issuer ratings at S-1 in both local- and foreign-currency. As per Rating Definitions updated in December 2025, Outlooks are not assigned to short-term ratings; hence the Outlooks for the short term issuer ratings have been withdrawn (irrelevant rating category).

The upgrade of Cyprus’s ratings is driven by:

1. Robust fiscal performance, underpinned by sustained primary surpluses, reflecting strong fiscal revenues and buoyant economic growth, which has led to a rapid decline in the debt-to-GDP ratio in recent years. Scope estimates that the public debt ratio fell to 55.4% of GDP in 2025, a 58.2 percentage point reduction in five years, which is among the fastest debt declines in modern times. This reduces debt vulnerabilities and provides Cyprus with fiscal buffers to respond to economic shocks. The favourable fiscal outlook, with the headline surplus expected to average 2.5% of GDP in the 2026-2030 period, along with sound economic growth, will help the debt ratio to remain on a steep downward trajectory toward below 40% in the next four years.
    
2. Continued strengthening of the banking system. A sustained fall in the stock of non-performing loans (NPLs), together with a rise in the NPL coverage ratio to record highs, has strengthened the banking sector’s capacity to provide credit and reduced the government’s contingent liabilities risks. Scope expects the NPL ratio to further decline over time and to converge toward the euro area average of around 2% in the medium term.

The Stable Outlook reflects Scope’s view that Cyprus’s A credit ratings balance the favourable fiscal and economic performance, against the challenges posed by a small and open economy, large external imbalances and legacy vulnerabilities in the banking sector.

For the updated rating report, click here.

Key rating drivers

The debt-to-GDP ratio remains on a firm downward trajectory, reflecting strong fiscal performance and sustained economic growth

Cyprus’s public debt has declined materially in recent years and is likely to remain on a firm downward trajectory over the medium term. This strengthens Cyprus’s fiscal resilience and provides the government with greater fiscal space to respond to economic shocks. Strong fiscal performance and a favourable economic environment have led to a significant reduction in the public debt-to-GDP ratio after its peak of 113.6% of GDP in 2020. Scope estimates that the debt ratio fell to 55.4% of GDP last year — lower than the 58.1% anticipated in the previous review — from 62.8% in 2024, and projects it to decline further to below 40% by 2030.

Risks to the favourable debt trajectory appear contained over the medium term. Debt levels are expected to decline further in volume terms while the government’s liquid assets, amounting to around 10% of GDP¹, provide an important buffer. This, together with a favourable average maturity of marketable debt, slightly above seven years², and limited funding needs, mitigates the impact on interest costs, even as the government will likely replace ESM debt with more expensive marketable debt. As a result, funding costs are expected to remain contained. Scope projects that the interest burden will stay at around 1.2% of GDP (2.8% of revenue) until 2030, close to the estimated 2025 level.

Looking ahead, Cyprus’s public finances are set to remain sound, benefitting from strong corporate income tax revenues supported by the large shares of ICT firms that have relocated to the country and by a resilient labour market. Following a record surplus of 4.1% of GDP in 2024, the government is estimated to have posted another large surplus in 2025. Despite the impact of the National Solidarity Fund, the costs associated with late-July 2025 wildfires in the Limassol district, and household subsidies, Scope estimates the budget balance to have recorded a surplus of 3.3% of GDP last year.

The impact of the tax reform — which among other measures envisages an increase in the corporate tax rate while easing the tax burden for middle-income earners — remains uncertain for public finances, particularly given tax breaks for households. Still, Scope expects Cyprus to record continued fiscal surpluses, particularly in the near term, reaching 3.1% of GDP in 2026 and 3.4% in 2027. With fiscal revenue growth slowing, surpluses are expected to decline gradually over the medium term, with the headline balance surplus likely to remain above 1.0% by 2030, among the highest in the European Union (EU). Main fiscal risks relate to high spending needs linked to climate, infrastructure, defence and ageing, at a time when fiscal revenues are normalising. Nevertheless, Cyprus’s favourable fiscal position helps mitigate these risks.

The strong labour market and low inflation underpin one of the fastest GDP growth rates in the euro area. Total employment — supported by the strong influx of foreign workers — has increased steadily in recent years, and the unemployment rate is the lowest in nearly 17 years at 4.3%. At the same time, inflation remains subdued (0.8% in 2025), reflecting weak growth in energy prices and the temporary VAT reduction on energy bills, and will likely rise gradually to 2% in 2027. After expanding by 3.9% in 2024³, real GDP growth is estimated to have remained strong at 3.5% in 2025. Sound private consumption growth, bolstered by rising real wages, and supportive public consumption and investment, were the main drivers. In 2026, dynamic private consumption and non-residential investment, underpinned by the implementation of the Recovery and Resilience Plan (RRP), remain important contributors to growth. Scope projects GDP to expand by 3.1% in 2026, broadly in line with Cyprus’s potential. Looking forward, while public investment is likely to moderate, private investment, alongside continued growth in tourism and ICT sectors, will support growth near the medium-term potential of around 3.0%.

The direct impact of higher US tariffs and ongoing geopolitical uncertainty has been contained for the Cypriot economy. US tariffs have so far been targeted at goods, while Cyprus’s exports consist predominantly of services. Cyprus is likely to be more negatively affected through weaker demand from its main European trading partners. However, provided geopolitical tensions do not spill over into tourism and FDI investments, the impact on the Cypriot economy is expected to remain limited.

Cyprus’s banking system vulnerabilities continue to decline

Cyprus’s financial stability risks have moderated in recent years, driven by higher bank capital levels, improved capacity to absorb loan losses, and a gradual decline in the NPL ratio. A healthier banking system reduces the contingent liabilities of the sovereign, and strengthens the supply of credit to the economy. The Common Equity Tier 1 (CET1) ratio stands around ten percentage points above the euro area average, and liquidity ratios remain high. Moreover, Cypriot banks posted a record-high NPL coverage ratio of 71% in October 2025 — among the highest in the EU — while the NPL ratio declined to 4.2% in the same month last year⁴, compared with the euro area average of around 2%. This is down from 6.2% at the end of 2024, reflecting a conservative provisioning approach shaped by legacy asset quality risks.

NPLs in the main systemic banks are largely legacy exposures, with significant volumes outside the banking system and transferred to Credit Acquiring Companies (CACs), while remaining particularly elevated in smaller banks. These factors somewhat constrain private-sector deleveraging. Moreover, the Cypriot banking sector remains relatively concentrated, with a few dominant institutions posing significant contingent liabilities for the government, due to their systemic importance.

Rating challenges: small, open and externally dependent economy vulnerable to shocks; external position characterised by large imbalances

Cyprus’s A credit ratings face structural constraints stemming from its small and open economy, and reliance on external demand, particularly on tourism and FDI, which make it vulnerable to external headwinds. Moreover, high dependence on foreign workers and energy imports increase Cyprus’s vulnerability to some key trading partners that are exposed to heightened geopolitical tensions.

Cyprus’s A credit ratings are also constrained by structurally large current account deficits, reflecting high import needs, moderate savings relative to domestic investment, and high repatriation of net profits by foreign-owned companies. This drives a highly negative net international investment position, high gross external debt and external financing requirements. Even so, Cyprus’s euro area membership, inflow of foreign direct investment, significantly more favourable external metrics – when adjusted for Special Purpose Entities – and prospects for energy exports help to mitigate risks.

Rating-change drivers

The Stable Outlook reflects Scope’s view that risks Cyprus face over the next 12 to 18 months are balanced.

Upside scenarios for the ratings and Outlooks are if (individually or collectively):

1. Significantly stronger macroeconomic stability due to, for example, lower external imbalances, enhances resilience against external shocks; and/or
    
2. Robust fiscal dynamics lead to a further material decline in general government debt.

Downside scenarios for the ratings and Outlooks are if (individually or collectively):

1. The fiscal outlook materially worsens placing the public debt on an upward trajectory; and/or
    
2. Macroeconomic stability weakens significantly due to, for example, more pronounced external imbalances, undermining the shock absorption capacity; and/or
    
3. The financial sector outlook weakens due to, for example, the resurgence of banking sector vulnerabilities.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a+’ for Cyprus. Under Scope’s methodology, the indicative rating receives 1) a one-notch positive adjustment from the methodological reserve-currency adjustment; and 2) no negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘aa-’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Cyprus’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope has identified the following QS relative credit strengths for Cyprus: i) Growth potential and outlook; ii) Fiscal policy framework; and iii) Long-term debt trajectory. Conversely, the following relative weaknesses have been identified for Cyprus: i) Macroeconomic stability and sustainability; ii) Current account resilience; iii) External debt structure; iv) Resilience to short-term external shocks; v) Banking sector performance; vi) Financial imbalances; vii) Environmental factors; and viii) Governance factors.

On aggregate, the QS generates a 2-notch negative adjustment and signals ‘A’ credit ratings for Cyprus.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, Cyprus is vulnerable to the adverse effects of climate change, which are likely to weigh on tourism and agriculture activity. Moreover, transition risks are also relevant, particularly given the country’s limited progress in upgrading its transport infrastructure. While Cyprus is gradually diversifying its energy mix away from fossil fuels, delays in key projects – including the implementation of the Great Sea interconnector and the modernisation of its electricity grid – continue to hinder progress. Cyprus’s plans to reduce reliance on fossil fuels include a long-term strategy for building renovations, a renewable energy roadmap, investments to encourage a shift towards green mobility, and a carbon tax. However, despite the large supply of renewable sources of energy, investment is lagging to gradually raise the share of renewable energy sources to one-third by 2030. This drives a ‘weak’ assessment relative to credit rating peers.

As regards social-risk factors, while Cyprus performs relatively well in terms of income inequality and labour force participation, population ageing is a challenge. Cyprus has posted one of the strongest improvements among EU countries regarding the share of the population at risk of poverty or social exclusion over the last years. Even so, the country performs poorly in terms of educational outcomes, with its PISA scores ranking consistently among the lowest EU performers. Cyprus’s human capital also performs poorly in terms of digitalisation capacity with shortfalls in terms of available ICT specialists and digital skills among nationals. Youth unemployment and the number of young people not in employment, education or training, estimated at around 13% in 2024, is among the highest in the EU. This drives a ‘neutral’ assessment relative to credit rating peers.

Under governance-related factors, Cyprus benefits from comparatively strong institutional quality, reflected in solid scores on the World Bank’s Worldwide Governance Indicators and stable political environment. Policy continuity is expected to remain broadly intact, following the May parliamentary elections, which are not projected to alter significantly the agenda under the President, Nikos Christodoulides. However, the longstanding geopolitical tensions with Türkiye related to the norther part of Cyprus pose structural risks to Cyprus governance. This drives a ‘weak’ assessment relative to credit rating peers.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. Fiscal Council Final report 2025 
2. Cyprus Investor presentation, November 2025 
3. Statistical Service of Cyprus 
4. Central Bank of Cyprus, Aggregate Cyprus Banking Sector Data 

Methodology
The methodology used for these Credit Ratings and Outlooks (Sovereign Rating Methodology, 27 January 2025) is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model (ex CVS Model) Version 4.1), available in Scope Ratings’ list of models, published under scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   YES
With access to internal documents                                 YES
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Carlo Capuano, Executive Director
Person responsible for approval of the Credit Ratings: Eiko Sievert, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 19 October 2018. The Credit Ratings/Outlooks were last updated on 10 October 2025.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2026 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin. Public Ratings are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.