Fitch Upgrades Cyprus to ‘BBB’; Outlook Stable

Fiscal Outperformance, Surpluses Expected: Public finances improved significantly last year, with the general government balance turning from a deficit of 1.7% of GDP in 2021 to a surplus of 2.3%, much higher than Fitch’s forecast of a small deficit at the previous review in September 2022. Public expenditure/GDP declined sharply, as Covid-19 support measures were discontinued, while revenues rose at a faster pace than nominal GDP. The improving public finance trends more than offset the impact of support measures to business and households to counter the impact of high energy prices.

For this year, we expect a lower surplus, due to the slowdown in economic activity, which will lower revenue growth, and continued energy-related support measures. We forecast the surplus to decline to 1.8% this year, before improving marginally to 2.0% of GDP in 2024. A sharper than expected slowdown in economic growth and especially domestic demand represents a risk to our projections of headline and primary fiscal surpluses.

Government Indebtedness on Downward Trajectory: Strong nominal GDP growth and the much-improved fiscal position translated to a sharp decline in the government debt to GDP ratio in 2022, to 86.5%, from 101.1% in 2021. Our projections are consistent with the government debt ratio falling further over the next two years, to 81.3% in 2024. This would still leave the debt ratio substantially higher than the ‘BBB’ median (2024 forecast of around 56%). Our baseline projections assume that the debt ratio will continue to decline over the medium term, to around 73% in 2027.

We assume that the Cypriot authorities will preserve a sizeable liquid asset buffer, in line with their prudent debt management strategy, and regularly issue bonds to at least partly cover upcoming debt amortisations. Yields on government debt have risen sharply, with the yield on the 10-year 0.95% bond issued in early 2022 now at around 4.3%. The average cost of Cyprus’s public debt will rise much more slowly, given the average maturity of debt of just under 7.5 years. We expect the interest-to-revenue ratio to rise from 3.6% in 2022 to 4.2% in 2024, which is below our forecast for the ‘BBB’ median (8.0%).


Macroeconomic Resilience to Shocks: The Cypriot economy has shown a degree of resilience to the external shocks brought about by the war in Ukraine. Real GDP expanded by 5.6% in 2022 (above our forecast of 4.7% last September), as tourism expenditure reached above 90% of its 2019 level, despite the absence of tourists from Russia for most of the year. In 2019, Russia accounted for almost 20% of tourist arrivals, but the loss of this market has been mostly offset by higher numbers from the UK, Israel, and EU countries. Moreover, strong growth in other sectors in the economy (e.g. information and communications technology services) points to greater diversification of economic activity.

Bank Asset Quality Improving: The overall trend in asset quality improvement in the Cypriot banking sector has been resilient to external shocks to the economy. Just before the spread of the Covid-19 pandemic in January 2020, the non-performing loan (NPL) ratio was 28.0%. It declined last year to 10.5% in October from 11.7% in January, and NPLs have fallen further, as Cyprus’s two systemic banks completed one and are close to completing a further large sale of NPLs.

Fitch’s Banking System Indicator (BSI) for Cyprus remains ‘b’, among the weakest of rated European sovereigns. However, the Positive Outlooks on the ratings of the two systemic Cypriot banks, which were both recently upgraded, point to potential improvements in the BSI. The implementation of a mortgage-to-rent scheme by the national asset management company to address the legacy of the most vulnerable borrowers is still pending approval by the European Commission.

Cyprus’s ‘BBB’ ratings also reflect the following key rating drivers:

Fundamental Rating Drivers: Income per capita levels and governance indicators are well above the ‘BBB’ median, and also compare favourably with the ‘A’ median. Institutional strengths and policy credibility are supported by EU and eurozone membership. These strengths are balanced by still high levels of public and private sector indebtedness, vulnerabilities in the financial sector, and a backdrop of regional political tensions related to the division of the island.

Slowing Economic Growth, Inflation: We expect a slowdown in economic growth this year, as high inflation erodes real incomes and rising interest rates dampen demand for loans, affecting consumption dynamics and private investment. At the same time, the deployment of Next Generation EU funds should offset some of the weakness of private domestic demand. Overall, we expect real GDP growth of 2.1% this year and 2.7% in 2024, as economic activity expands at a faster pace from the middle of this year.

Consumer price inflation is falling from its peak in July 2022, when Harmonised Index of Consumer Prices (HICP) inflation reached 10.6%. Inflation has since decreased to 6.7% in February this year. We expect headline inflation to continue falling this year, thanks also to lower oil prices, averaging 4.5%, and falling further in 2024, to 2.5%.

New President Elected: The run-off for the presidential election on 5 February saw former foreign minister Nikos Christodoulides, supported by several centrist, nationalist and centre-left parties, defeat Andreas Mavroyiannis, supported by leftist AKEL, by 52% to 48%. The candidate for DISY (Democratic Rally) only came third in the first round, despite it being the largest parliamentary group in the Cypriot legislature, and was hence excluded from the run-off. We do not expect a substantial change in the broad direction of economic policy under the new administration.

Large External Deficit, NIIP: The current account deteriorated sharply in 2022 with the goods balance worsening as a result of high imported oil prices and strong domestic demand. This was partially offset by an improved services balance, but we estimate that the current account deficit was 9.7% of GDP in 2022, much higher than the ‘BBB’ median (2022 estimate: 1.8% deficit). We expect this to narrow from next year in a context of weaker domestic demand and lower commodity prices, reaching 6.5% in 2024.

External balance sheets are affected by the assets and liabilities booked for special purpose entities (SPEs) resident in Cyprus but with little connection to the Cypriot economy. Excluding SPEs, the net international investment position is still substantially negative, albeit on a gradually improving trajectory (-38.6% of GDP in 3Q22, compared with -52.5% five years earlier).

Country Ceiling Revised Upwards: Fitch has revised Cyprus’s Country Ceiling by three notches, to ‘AA’ from ‘A’. Cyprus’s Country Ceiling uplift was previously lower than the maximum six-notch uplift for eurozone countries on account of the imposition of capital controls in 2013-2015. We do not believe that the uplift for Cyprus should be lower than the maximum uplift, and assess that the risks of capital or exchange controls in Cyprus are low, albeit non-negligible, as is the case for most eurozone countries.

ESG – Governance: Cyprus has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Cyprus has a high WBGI ranking at 70.3, reflecting its long track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.

Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Macro/Structural: An adverse shock that has a significant negative impact on macroeconomic performance and asset quality in the banking sector.

-External Finances: A further, significant deterioration in external finances resulting for example from adverse macroeconomic developments in major trading partners or renewed energy price volatility.

-Public Finances: An upward trend in public debt/GDP, for example due to weak growth, structural fiscal loosening, or the materialisation of contingent liabilities.

Factors that could, individually or collectively, lead to positive rating action/upgrade:
-Macro/Structural: Further progress in addressing legacy vulnerabilities in the financial sector, including asset quality improvements in the banking sector, consistent with increasing the economy’s resilience and enhancing credit provision to the private sector.

-External Finances/Macro: Reduced vulnerability to external shocks, for example, stemming from a narrowing in the current account deficit, and increased diversification of economic activity.

-Public Finances: A faster than expected decline in public indebtedness over the medium term, with the decline resilient against external headwinds.

Fitch’s proprietary SRM assigns Cyprus a score equivalent to a rating of ‘A-‘ on the Long-Term Foreign-Currency (LT FC) IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM score to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

  • Structural: -1 notch, to reflect significant banking-sector weakness, including the high, albeit declining NPLs that could impair credit provision, pose contingent liability risks to the sovereign and lead to heightened macro-stability risks.
  • External Finances: -1 notch, to reflect the history of external and banking crisis, and the lack of diversification of external revenues, reflected in the high weight of tourism in exports.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit

The principal sources of information used in the analysis are described in the Applicable Criteria.

Cyprus has an ESG Relevance Score of ‘5[+]’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Cyprus has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Cyprus has an ESG Relevance Score of ‘5[+]’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Cyprus has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Cyprus has an ESG Relevance Score of ‘4[+]’for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Cyprus has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Cyprus has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Cyprus, as for all sovereigns. As Cyprus has a fairly recent restructuring of public debt in 2013, this has a negative impact on the credit profile.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit