The rating agency Moody’s completed a periodic review of Cyprus, without making an announcement about a change in the credit rating.
The country’s ratings remain at investment grade A3 with a stable outlook.
The review was conducted through an evaluation panel that met on 21 May 2026.
According to a statement from the house, Cyprus’ A3 ratings reflect the country’s high levels of wealth and strong growth performance, which is expected to remain strong in the medium term, although moderate in the short term, as risks of conflict in the Middle East negatively impact tourism and inflation.
While the economy is small and therefore less resilient to shocks than a larger economy, it is emphasized, it has good institutional capacity and policy-making is generally effective.
Falling debt, pressures on spending
According to the house, public debt levels continue to follow a steady downward path, having fallen below the 60% Maastricht threshold, and debt affordability indicators are stable.
While public finances have improved significantly, it added, spending pressures related to infrastructure needs, health care costs, public sector wage costs and aging costs pose a continuing risk to the future course of public finances.
Finally, banking sector risks remain a key risk factor, although these have decreased given the structural improvements in the system.
At 2.3% growth in 2026
Cyprus’ growth performance remained in line with the house’s expectations, with real GDP growing by 3.8% in 2025, supported by the continued diversification of the economy.
“Amid worsening economic performance due to the conflict in the Middle East, which will negatively impact energy prices and demand for tourism, we expect growth to moderate to 2.3% in 2026 before recovering to 2.8% in 2027,” he says.
The tourism sector entered 2026 from a position of strength, but a drone attack on a UK military base on March 2 caused sharp short-term disruption, with arrivals down 30.7% year-on-year in March. This risk, he estimates, is partly mitigated by the diversification of source markets, with EU countries now accounting for 42% of arrivals.
At the same time, Cyprus is reported to benefit from a highly productive Information and Communications Technology (ICT) sector, which accounted for 14.4% of Gross Value Added in real terms in 2025, although recent foreign direct investment inflows are also “highly mobile” and therefore at risk of reversal despite relocation costs.
The government recorded a fiscal surplus of 3.4% of GDP in 2025, and debt was reduced to 55.3% of GDP. The house expects surpluses of 2.3% in both 2026 and 2027, with debt falling to 37.7% by 2030.
The expected reduction in the surplus mainly reflects the comprehensive tax reform introduced in December 2025. However, Cyprus faces the significant institutional challenge of managing good economic periods with minimal fiscal cushions, as EU fiscal rules are unlikely to be binding during this growth period, given the country’s primary surplus and debt below 60% of GDP.
Fiscal policy remains pro-cyclical and structural spending pressures are piling up including infrastructure upgrades, persistent deficits in the National Health Services Agency, the LNG (Liquefied Natural Gas) Terminal arbitration in Vasiliko, rising defense spending and climate change adaptation costs estimated at €3.4 billion by 2035.
The main danger is that several of these pressures will crystallize at the same time, he stresses. However, he says, the rapidly improving public finances provide significant fiscal space for their absorption. The key question, he notes, is whether authorities are using it proactively.
In baa1» the economic power
The house rates Cyprus’ economic strength as ‘baa1’, which balances high levels of wealth and a steady growth rate against the small size of the economy.
It rates the strength of institutions and governance at ‘a2′, which reflects Cyprus’ strong institutional capacity and effective policy-making. It rates fiscal strength at ‘a1’, reflecting a moderately and rapidly declining general government debt and favorable debt affordability ratios. Sensitivity to ‘baa’ event risk is determined by political and banking risks.
Stable prospects
The stable outlook reflects a balance of risks related to the economic, fiscal and debt outlook. Sensitivity to event risk is determined by banking sector risks and political risks, which the house considers moderate.
“Although non-performing loans remain in the economy, the number of non-performing loans in the banking sector is on a steady decline and banks generally display large capital reserves and improved profitability,” it noted.
What will judge the ratings
According to the house, upward pressure on Cyprus’ ratings could arise if it becomes increasingly likely that the country’s fiscal and debt ratios will outperform current forecasts on a sustained basis.
In addition, the higher-than-forecast growth trend in the medium term could lead to upward rating pressures, possibly due to a significant impact from private and public investment, increased foreign direct investment and/or better-than-expected labor market trends.
The impact of investments and reforms related to the Cyprus Recovery and Resilience Plan could have a more substantial impact on growth trends and the assessment of institutional and intergovernmental strength than currently expected.
Finally, the exploitation of natural gas resources, which are currently not included in economic and fiscal forecasts, could create upward pressure on the valuation in the medium term.
Conversely, Cyprus ratings could come under downward pressure if fiscal and debt results fall significantly short of current expectations, leading to a reversal of the downward trend in the public debt ratio. This could occur due to less prudent fiscal policy, such as higher-than-expected growth in public sector wage costs or the realization of spending pressures in the health care sector.
In addition, a significantly weaker economic outlook than current forecasts could contribute to this scenario, possibly due to an outflow of skilled foreign labor, cancellation or postponement of major foreign direct investment projects, continued negative pressures on the tourism industry, or increased geopolitical risks.