Finance Minister Makis Keravnos on Saturday welcomed Morningstar DBRS’ decision to revise Cyprus’ credit outlook from stable to positive while affirming the Republic’s long-term rating at ‘A’, describing it as further confirmation of the economy’s resilience amid global uncertainty.

In a written statement, Keravnos said the decision “constitutes yet another confirmation of the resilience demonstrated by the Cypriot economy amid a period of continuing instability for the global economy, full of challenges and risks”.

“It is particularly important that the agency confirms the prudent and proactive economic policy pursued by the government, which continuously strengthens the economic position of the Republic of Cyprus and leads to the steady reduction of public debt,” he said.

Keravnos also pointed to what he described as Cyprus’ substantial fiscal buffers, saying these allowed the government to respond in the short term to potential risks arising from international geopolitical developments.

He said the government would continue supporting the economy “in a responsible and flexible manner”, both in terms of growth and employment and public finances, while seeking to make the most of opportunities for continued economic growth alongside further debt reduction.

Morningstar DBRS issued its assessment late on Friday, affirming Cyprus’ long-term credit rating at ‘A’ and changing its outlook to positive from stable. It also affirmed the Republic’s short-term ratings at R-1 (low), while similarly revising their outlook to positive.

The change signals an increased possibility of a future upgrade if improvements in Cyprus’ public finances and economic resilience continue.

“The positive trend reflects Morningstar DBRS’ view that Cyprus will maintain its strong fiscal position and continue to reduce its public debt burden,” the agency said.

It expects favourable growth prospects and sizeable structural fiscal surpluses to drive public debt from 49.9 per cent of GDP in 2026 to below 40 per cent by 2029.

The finance ministry said the assessment represented “significant confirmation of the resilience and positive prospects of the Cypriot economy in an international environment of increased uncertainty and geopolitical challenges”.

According to Morningstar DBRS, private consumption, investment and strong exports of services, both from tourism and non-tourism sectors, are expected to continue supporting economic growth.

After GDP expanded by 3.8 per cent in 2025, the Central Bank of Cyprus expects real growth of around 3 per cent annually over the forecast period.

The agency also said the impact of the war in the Middle East on the Cypriot economy had been smaller than initially expected, although lower tourist arrivals and higher imported inflation are expected to weigh on economic activity in 2026.

Cyprus recorded a fiscal surplus of 3.4 per cent of GDP in 2025, down from 4.1 per cent in 2024, but still the highest in the European Union, according to Morningstar DBRS.

Government revenue reached €15.9 billion, or 43.6 per cent of GDP, compared with €9.7 billion, or 41.3 per cent of GDP, in 2019.

The agency linked the rise in revenue to the expansion of the corporate tax base, policies aimed at attracting foreign companies to establish headquarters in Cyprus and increases in employment and wages, which have boosted social insurance contributions and personal income tax receipts.

For 2026, the fiscal surplus is expected to narrow to 2.3 per cent of GDP, reflecting measures taken to address the impact of the Middle East war, the tax reform and costs linked to the agreement between Kedipes and Hellenic Bank.

The finance ministry expects the surplus to increase again from 2027, averaging 3.1 per cent of GDP between 2027 and 2029.

Public debt has meanwhile fallen sharply, from 96.5 per cent of GDP in 2021 to 55 per cent in 2025. It is expected to fall below 50 per cent by the end of 2026 and below 40 per cent by 2029.

Morningstar DBRS also highlighted Cyprus’ social insurance system, whose accumulated reserve stands at around €12 billion, equivalent to 33 per cent of GDP. The system currently generates an annual surplus of around €1 billion, or 2.7 per cent of GDP, providing a stable source of financing for public finances.

Short-term financing risks are further mitigated by the central government’s cash buffer, which stood at 6.9 per cent of GDP in July.

The agency nevertheless identified potential risks, including an economic shock or the materialisation of contingent liabilities linked to Cyprus’ large domestic banking sector, whose total assets exceed 200 per cent of GDP.

Morningstar DBRS noted that the political environment remained stable despite the more fragmented landscape following May’s parliamentary elections. Given Cyprus’ presidential system, it said the election result did not change the composition of the government and was unlikely to significantly alter fiscal policy or reforms under the Recovery and Resilience Plan. 

The agency was more cautious over institutional indicators, noting that Cyprus’ standing in the Worldwide Governance Indicators, including on control of corruption and the rule of law, has deteriorated in recent years and is now below the EU average. EU membership, however, continues to provide an important institutional anchor.

On the Cyprus problem, Morningstar DBRS said the prospects of significant progress in UN-led reunification talks currently remained limited.

As for the next rating decision, the agency said Cyprus could be upgraded if public debt falls in line with current expectations and there is evidence of greater economic resilience and improvements in labour productivity.

The outlook could return to stable if the economy proves less resilient to external pressures or the expected decline in debt falls significantly short of projections. A substantial deterioration in the public debt trajectory or a structural weakening of the country’s growth prospects could ultimately lead to a downgrade.