Cyprus’ A rating upgrade puts focus on the cost-of-living divide

Cyprus’ economy received another major vote of confidence this week after Fitch Ratings upgraded the country’s long-term credit rating to A from A-, but the improvement in its public finances and growth prospects has yet to fully translate into a sense of economic security among households facing persistent living costs.

The upgrade, accompanied by a stable outlook, reflects strong fiscal performance, rapidly declining public debt and resilient economic growth, with Fitch forecasting that Cyprus will continue to outperform many of its European peers.

Yet the rating improvement comes against a backdrop of renewed inflationary pressures, expensive housing and questions over the sustainability of public spending, as well as concern that the headline performance of the economy does not adequately reflect people’s day-to-day experiences.

The government has presented the upgrade as evidence that its economic policy is working, arguing that stronger public finances create room for better-paid jobs, investment and social support.

However, the challenge going forward is not simply to preserve the country’s fiscal standing, but to ensure that economic growth is felt more broadly across society, while addressing structural weaknesses that could undermine the progress made in recent years.

Strong public finances, but risks remain

Fitch expects Cyprus to maintain a general government surplus of 3.2 per cent of GDP in 2026, matching the previous year and remaining the highest in the euro area.

The agency forecasts that surpluses will average 2.9 per cent of GDP in 2027 and 2028, supported by spending restraint, strong revenue collection and a favourable economic environment.

Public debt is expected to fall from 52.4 per cent of GDP in 2025 to 46.3 per cent this year, before declining further to 36.6 per cent by 2028.

Fitch said this would represent a 77-percentage-point reduction from the 2020 peak, one of the sharpest declines internationally, bringing the debt ratio well below the median of 59.5 per cent for countries rated A.

The agency also expects economic growth to remain at 3 per cent annually between 2026 and 2028, exceeding both the euro area average and the median for similarly rated economies.

It attributed this performance to strong domestic consumption, the continued expansion of services and a more diversified economy, with revised figures indicating that Cyprus grew by an average of 6.6 per cent annually between 2022 and 2025.

Fitch also pointed to historically low unemployment, which it expects to average 3.8 per cent over its forecast period, and the resilience of the banking sector.

The banks’ common equity tier one capital ratio stood at 25.5 per cent in June 2026, the highest in the European Union, while non-performing loans remained at 1.6 per cent, down from a peak of almost 45 per cent in 2015.

Nevertheless, the agency warned that external vulnerabilities remain significant, particularly the current account deficit, energy dependence and the country’s exposure to geopolitical risks.

The current account deficit is expected to average 8.1 per cent of GDP between 2026 and 2028, while Fitch said the economy remained vulnerable to changes in investment sentiment and regional political tensions linked to the island’s division.

The inflation challenge and household purchasing power

The most immediate concern for households is that economic growth and falling public debt do not necessarily mean that everyday expenses are becoming more manageable.

Fitch highlighted the rise in harmonised inflation, which reached 5.2 per cent in September, up from 0.9 per cent in February, reflecting higher energy costs and more expensive services.

The agency expects inflation to average 4 per cent in 2026 before easing to 2.5 per cent in 2027 and 2028, assuming energy costs moderate.

However, the latest national figures have continued to show the pressure on consumers, with Cyprus’ annual inflation rate reaching 4.4 per cent in October, while Eurostat’s separate harmonised measure stood at 5.4 per cent in its flash estimate.

The difference reflects the distinct methodologies used by the national Consumer Price Index and the Harmonised Index of Consumer Prices, rather than necessarily indicating a discrepancy in underlying price movements.

Energy remains a key driver, with petroleum products rising by 30.6 per cent year-on-year in October and electricity and water increasing by 13.6 per cent.

Fitch said Cyprus’ dependence on imported fossil fuels made the economy particularly vulnerable to international energy shocks, while the country’s relatively slow transition towards greener energy continued to leave costs elevated.

The agency also expects moderate wage pressures to increase from 2027 as cost-of-living indexation adjustments take effect, although at a much slower pace than in 2022 and 2023.

For households, the concern is that higher prices can erode the purchasing power of income even when employment is strong and the economy is expanding.

President Nikos Christodoulides has sought to address this gap in his response to the upgrade, saying that positive economic indicators and European rankings acquire real value only when they translate into tangible benefits for citizens.

“A stronger economy means more and better-paid jobs, more investment and new opportunities. It means greater possibilities for targeted social policies and investment in health, education, the welfare state and housing,” he said.

“It means strengthening income, better services and meaningful support for citizens. Above all, it means building a safer foundation for future generations,” the president added.

Housing affordability exposes the gap

The disconnect between economic performance and household finances is particularly visible in the property market.

A recent study by real estate analytics firm Ask Wire found that only 1.8 per cent of two- and three-bedroom apartments advertised for sale in Limassol were priced within the estimated €256,000 budget of a hypothetical average-income household.

The analysis, based on 25,550 active listings across government-controlled areas of Cyprus, found that Nicosia offered the greatest overall choice of apartments within the study’s assumed budget.

Ask Wire modelled a household comprising two working adults and two dependent children, each earning the estimated median salary, with combined gross monthly income of approximately €4,503 and net income of €3,988.

Assuming a mortgage interest rate of 3.24 per cent over 25 years, with no other outstanding loans and 25 per cent of net income allocated to repayments, the household could afford a monthly instalment of around €997.

That would support a property purchase of up to €255,995, requiring an initial deposit of €51,199, equivalent to 20 per cent of the price, before other purchase expenses.

The company stressed that the 25 per cent repayment threshold was an assumption for its analysis, rather than a Central Bank of Cyprus limit or a guarantee of mortgage approval.

The findings underline how housing costs can remain prohibitive even for households with two incomes, particularly in Limassol, where property prices have been driven by demand from local and international buyers.

Fiscal strength does not remove structural weaknesses

The Fiscal Council has also cautioned against treating Cyprus’ current economic performance as grounds for complacency.

In its interim report, council chairman Andreas Charalambous said the economy remained resilient, but continued to face long-term weaknesses that are not always visible in headline indicators.

These include low public investment, weak productivity, limited administrative capacity and social spending that is not always adequately targeted.

The council said the implementation of government-backed development projects reached just 25 per cent in the first half of 2026, reflecting difficulties in designing and delivering large-scale projects.

It also warned that future growth could not depend indefinitely on expanding employment, particularly as the population ages and the number of people of working age contracts.

Migration and the arrival of foreign companies have supported economic activity, employment, consumption and services exports in recent years, but the council said productivity must become a greater driver of growth.

The public sector wage bill is another growing concern.

Compensation for public employees was projected to reach around €4.1 billion in 2025, up from €3.9 billion in 2024 and equivalent to close to 12 per cent of GDP.

General government payroll expenditure rose from €3.17 billion in 2022, while the number of employees increased from 66,287 to 71,675 over the same period.

Economist Ioannis Tirkides told the Cyprus Mail that the public sector wage bill had “re-emerged as a major fiscal risk, threatening budget flexibility in the medium term and the economy’s wider competitiveness”.

He said the bill now absorbed “more than 12 per cent of GDP and close to 30 per cent of government expenditure”, well above EU averages.

The council has called for a binding three-year fiscal framework, tighter evaluation of public investment and recruitment based on documented operational needs.

It has also warned that pension reform will become increasingly important as the ratio of working people to pensioners is projected to fall from four to one to two to one.

Government insists growth can fund social support

The government has defended its fiscal approach, arguing that surpluses and lower debt allow it to provide support without undermining the country’s economic stability.

Finance Minister Makis Keravnos said more than €1 billion had been allocated since 2023 through five support packages aimed at containing the cost of living, including measures linked to the energy crisis and regional conflicts.

“The aim of our policy is to improve the daily lives of citizens by practising a broad social policy that contains and enhances the available income of workers, vulnerable persons and households,” he said.

Keravnos said the government’s fiscal surpluses and reduction in public debt allowed it to repay loans and return the benefits of growth to society through targeted measures.

He also pointed to the tax reform due to take effect in January, saying that around 200,000 people would see an improvement in disposable income, while more than 50,000 would pay no income tax.

The measures include tax relief for rent or mortgage interest on first homes, green investments and additional deductions for families with children.

The minister has also defended higher VAT receipts, arguing that they reflect stronger consumption rather than inflationary taxation, and said the government was seeking to extend reduced excise duty on motor fuels until March 2027.

However, Fitch said it did not expect significant additional fiscal support to offset higher energy prices beyond measures already enacted, estimated at 0.2 per cent of GDP.

The government’s challenge is therefore to maintain its fiscal credibility while ensuring that support reaches households most affected by rising prices.

What comes next

Fitch’s upgrade places Cyprus in a stronger position to attract investment and potentially benefit from lower borrowing costs, while reinforcing confidence in its economic policy.

The agency said a further improvement in the rating could depend on reducing external vulnerabilities, including the large current account deficit, and improving GDP per capita and governance indicators towards those of higher-rated peers.

A downgrade, meanwhile, could follow a sharp increase in public debt or an external shock that intensifies vulnerabilities and leads to a prolonged slowdown.

For Cyprus, the central question is whether the current economic momentum can be converted into more affordable housing, stronger purchasing power, higher productivity and sustainable public services.

The country has made considerable progress in reducing debt, strengthening its banking system and diversifying its economy, but the benefits of those achievements will be judged increasingly by what households experience beyond the headline figures.