Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Cyprus’s (Cyprus) long-term issuer and senior unsecured debt ratings at A- in both local and foreign currency and revised the Outlooks to Positive from Stable. Scope has also affirmed Cyprus’s short-term issuer ratings at S-1 in both local and foreign currency with a Stable Outlook.

The revision of the outlooks reflects the view that robust primary surpluses, on the back of strong fiscal revenues and a supportive economic environment, will lead the debt-to-GDP ratio to a rapid decline in the coming years. Scope projects the headline budget surplus to remain elevated at 3.6% of GDP in 2025, after the record-high of 4.3% last year¹, before gradually falling to 1.1% in 2030, which would be still among the highest in the euro area. Moreover, despite high uncertainty on the impact of tariffs and heightened geopolitical tensions, Cyprus’s growth will likely remain resilient. Scope anticipates GDP to expand by 3.1% on average in the 2025-2027 period, broadly in line with its estimated potential growth. This will help the public debt-to-GDP ratio fall below 60% this year, the first time since 2010 and remain on a steeper than anticipated downward trajectory towards 50% of GDP by 2027.

Scope also notes that banking system resilience continues to improve. Despite still-elevated interest rates, the stock of non-performing loans (NPLs) has fallen to historic lows within the banking sector while the NPL coverage has reached record highs, well above the EU average. Moreover, the forthcoming activation of the countercyclical capital buffer (CCyB) will further bolster banks’ resilience, though legacy credit risks concentrated in Credit Acquiring Companies (CACs) and smaller banks, alongside high sector concentration in the banking system, continue to pose contingent risks for the sovereign.

Cyprus’s credit ratings are challenged by: i) the small, open and externally dependent economy that is vulnerable to shocks due to the high dependence on foreign workers, oil imports and external demand; ii) an external position characterised by large imbalances reflecting high import needs, moderate savings and high repatriation of profits by foreign-owned companies; and iii) lingering albeit improving vulnerabilities in the banking sector, as reflected in still relatively elevated non-performing exposures.

For the updated rating report, click here.

Key rating drivers

Robust fiscal performance and sustained economic growth bodes well for debt-to-GDP reduction

Cyprus’s fiscal outlook is strong. After a record high of 4.3% of GDP in 2024, the surplus in the budget, fuelled by tax revenues and social security contributions, is expected to decline but to remain sound going forward. Scope projects it to drop to 3.6% of GDP in 2025, as large investments, including the Great Sea interconnector between Cyprus and Greece and an LNG terminal, alongside the mortgage-to-rent scheme, will place upward pressure on public accounts. Moreover, the impact related to the National solidarity fund as well the cost related to wildfires occurred end-July 2025 in Limassol district, will also weigh on public finance. However, fiscal revenues are expected to remain strong over time, reflecting improved capacity to collect taxes, and still dynamic economic growth. Against this background, we anticipate headline surplus to fall only gradually to 1.1% by 2030.

Further, Scope does not expect the conservative fiscal stance to be undermined by the upcoming tax reform. The government plans to ease the tax burden on middle-income earners while introducing a green tax and raising the corporate income tax rate, among other things. Full details are not yet available, but the impact is likely to be fiscally neutral. Over the medium term, main risks to public accounts related to the capacity to absorb high spending for climate, infrastructure needs, defence and ageing, as growth in fiscal revenues normalises. Nevertheless, Cyprus’s favourable fiscal position mitigates these risks.

Cyprus’s economic prospects remain favourable. After growing by 3.4% last year², Scope expects GDP to only slightly decelerate to 3.1% in 2025. Dynamic domestic demand, bolstered by rising real wages coupled with higher investments and a sound labour market underpin Cyprus’s economic performance. Looking forward, the country’s GDP is expected to continue to expand at around 3% annually, broadly in line with its potential. Supportive private consumption and non-residential investment, in the context of the implementation of the Resilience and Recovery plan, will remain important contributors particularly in 2026. Going forward, while public investment is likely to moderate at the end of the RRP, private investment will remain resilient supporting growth along with tourism and the ICT sector.

The direct impact from higher US tariffs and geopolitical uncertainty is unlikely to materially affect Cyprus’s economic growth. Tariffs have been targeting only goods so far, while Cyprus’s exports account largely for services. The country is likely to be more negatively affected through weaker demand from main European trading partners. However, as long as geopolitical tensions do not spill over into tourism and FDI investments, the impact on the Cypriot economy is expected to remain contained.

Cyprus’s strong fiscal position is favourable for the debt-to-GDP trajectory, which will likely decline more rapidly than previously expected. After a decline of almost 50 percentage points to 65.1% in 2024 since 2020, the public debt ratio remains on a steep downward trajectory. Scope estimates that a sizeable primary surplus, gradual drawdown of cash buffers and an economic growth close to 3.1% will enable public debt to fall to 58.1% of GDP this year, better than previously expected (58.8%). Risks to the debt trajectory appear low in the coming years. The stock of debt is set to continue to decline in absolute value, at least until 2027³. This, along with a favourable debt maturity of around 7 years⁴, and limited funding needs, mitigates the impact on interest costs, as the government will likely replace ESM debt with more expensive marketable debt. As a result, funding costs will remain contained. Scope estimates the interest bill to stay at 1.3% of GDP by 2027. Looking forward, the public debt ratio, absent of shocks, could fall below 50% in 2027.

Cyprus’s banking system vulnerabilities continue to reduce

Cyprus’s financial stability risks are also decreasing. Loan-loss absorption capacity, bolstered by growing capital and NPL coverage ratio, makes the banking system more resilient. At the same time, the NPL ratio continues to fall uninterruptedly towards the EU average. Meanwhile, the upcoming introduction of a countercyclical capital buffer (CCyB), effective from January 2026, will lock-in capital without affecting banks’ capacity to provide credit.

NPLs are now mainly a legacy problem, with significant volumes outside the banking system and transferred to CACs, though they remain particularly elevated in smaller banks. The headline NPL ratio fell by around 1.3 percentage points over the past 12 months to 5.6% as of June 2025⁵. The rise in the NPL coverage ratio to 62% from 55% a year earlier further strengthens banks’ loan-loss absorption capacity.

However, the large stock of legacy NPLs held by CACs continues to weigh on household and corporate balance sheets, limiting private-sector deleveraging. In addition, the Cypriot banking sector is relatively concentrated, with a few dominant institutions posing a significant contingent liability for the government, given the sector’s systemic importance.

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

Cyprus’s A- credit ratings are constrained by its small, open economy that remains reliant on a few externally driven sectors, including tourism, that are vulnerable to external headwinds. Moreover, high dependence on foreign workers, energy imports and external demand increases 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 imports needs, moderate savings relative to domestic investment and high repatriation of 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 Positive Outlook for Cyprus represents Scope Ratings’ view that risks to the ratings are tilted to the upside.

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

1. Continued improvement in fiscal dynamics lead to a material decline in general government debt.
    
2. Significantly stronger macroeconomic stability due to, for example, lower external imbalances, enhancing resilience against external shocks;
    
3. Further improvement in financial sector resilience occurs, for example, with a prolonged reduction of non-performing loans towards EU average.

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

1. The fiscal outlook material worsens due to, for example, a loosening of the fiscal stance challenging the expected decline in general government debt;
    
2. Macroeconomic stability weakens significantly due to, for example, more pronounced external imbalances, undermining the shock absorption capacity;
    
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 ‘a+’ 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.

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 could be damaging for sectors such as tourism and agriculture. Transition risks are largely dependent on investment in the transport sector. The country is gradually diversifying its energy mix from fossil fuels, although delays are affecting the implementation of the Great Sea interconnector and the modernisation of its electricity grid. 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 vast 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, Cyprus performs relatively well in terms of income inequality and labour force participation, while 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 relatively strong performance on the World Bank’s Worldwide Governance Indicators. Presidential elections in February 2023 saw the victory of independent candidate Nikos Christodoulides for a 5-year term with the backing of centrists and centre-right parties. Institutional reforms to support transparency in decision-making and on the protection of whistleblowers help to improve governance. However, the longstanding geopolitical tensions with Türkiye persist. 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. Ministry of Finance
2. Cyprus’s statistical service
3. Cyprus Fiscal Council
4. Public Debt Management Office 2024 Annual report
5. Aggregate Cyprus Banking Sector Data

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Ratings Methodology, 27 January 2025), is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign Quantitative 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 Outlook 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 25 October 2024.

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
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