Drought and extreme heat pose escalating risks to Cyprus tourism and farming

Rising temperatures and water scarcity threaten long term Cyprus growthEurope’s worsening drought is already disrupting agriculture, inland transport and energy production, Morningstar DBRS has reported, with the warning carrying particular significance for water-stressed Cyprus and its climate-sensitive sectors such as agriculture and tourism. In a new analysis of the effects of extreme weather during the summer of 2026, the credit ratings agency said successive heatwaves and below-average rainfall had produced widespread drought conditions and intensified existing water shortages across parts of Europe. Morningstar DBRS said droughts were becoming more frequent and severe globally, while research into the economic effects of extreme weather and natural disasters increasingly showed that drought was causing substantial financial damage. In Europe, severe drought is affecting agriculture, inland waterways, industry and energy generation, with disruptions potentially spreading through wider economic activity. The agency said the consequences for the creditworthiness of most sovereigns it rates remained limited for now, as the costs faced by governments were considered manageable. However, it warned that the long-term economic consequences of physical climate risks will depend heavily on adaptation efforts, as well as on how climate change and weather patterns develop. “As climate risks accumulate and droughts become more frequent and costly, it is critical to assess the various economic impacts,” said Senior Vice-President in Morningstar DBRS’ Sovereign Ratings Group Adriana Alvarado. “Climate change adaptation and preparedness should keep pace with the intensity and frequency of climate risks,” Alvarado added. “When it comes to creditworthiness impacts, we examine, for governments at various levels, whether climate change and adverse weather events could destroy a significant part of national wealth, weaken the financial system or disrupt the economy,” she explained. For Cyprus, the warning comes against a backdrop of high exposure to physical climate risks, particularly through water availability, agriculture and tourism. A previous study by the Economics Research Centre of the University of Cyprus (CypERC), estimated that cumulative discounted GDP losses under a business-as-usual climate scenario could reach about €29 billion by 2050, rising to €162 billion by 2100. The research identified tourism, financial services and agriculture among the sectors particularly vulnerable to climate change. Under its business-as-usual scenario, the study estimated tourism losses of about €3.8 billion by 2050, compared with €2.4 billion under a middle-of-the-road scenario and €500 million under a sustainability scenario. Agriculture was projected to face GDP losses of €500 million under the business-as-usual scenario, €250 million under the middle-of-the-road scenario and €60 million under the sustainability scenario. The figures underline why drought is more than an environmental concern for Cyprus, where limited water resources and prolonged hot, dry periods can directly affect agricultural production and increase pressure on water infrastructure. Tourism is also exposed as rising temperatures and more frequent extreme weather begin to challenge the traditional Mediterranean summer model. “Climate, quality and digital data will determine tourism development over the next five years,” said Research Director at the World Travel and Tourism Council Nejc Jus earlier this year, warning that climate adaptation would become critical as extreme heat reshaped seasonal travel patterns. Jus said destinations would need to extend shoulder seasons or risk losing visitors during the hottest part of the summer. For Cyprus, that potentially creates a challenge for a tourism model that remains heavily concentrated in the warmer months. At the same time, the country has been under pressure to increase investment in climate adaptation and mitigation. Cyprus’ Fiscal Council has previously warned that spending to address climate risks remained well below what was required, highlighting the country’s high sensitivity and exposure to physical climate change. It argued that the cost of inaction could be considerably higher than the cost of investment, with implications for public finances, households and businesses. The council also warned that climate risks could increasingly feed into financial and credit risks, potentially affecting businesses’ borrowing costs and, ultimately, the country’s credit ratings. Meanwhile, Cyprus has made some progress in the private sector towards addressing climate-related risks. More than 1,200 Cypriot companies had completed sustainability assessments through the Synesgy platform under an interbank ESG project, with small and medium-sized enterprises accounting for 90 per cent of the businesses assessed. The initiative found progress across environmental management, energy efficiency, human resources, health and safety, governance and risk management, although the average sustainability score remained at C. The broader economic challenge is particularly significant because Cyprus’ greenhouse gas emissions have moved in the opposite direction to the EU’s overall trend. Early estimates from Eurostat showed that Cyprus’ emissions had risen by 10.7 per cent over the decade to 2025, while EU emissions fell by 17.2 per cent over the same period. Indeed, the island was one of only four EU member states to record an increase. Cyprus has nevertheless been seeking greater regional cooperation on climate adaptation, with the government using an international climate conference in Nicosia earlier this year to call for stronger cooperation across the Eastern Mediterranean and Middle East. President Nikos Christodoulides said at the time that the region needed to turn the climate crisis into “an opportunity” to build more resilient economies and sustainable societies. The Morningstar DBRS warning suggests that the economic stakes of that resilience are increasing. For Cyprus, drought is not simply a question of rainfall or agricultural output. It can affect water security, food production, tourism patterns, energy generation, public finances and the wider resilience of the economy, making investment in adaptation increasingly relevant to both economic policy and long-term credit risk.