More frequent droughts and extreme heat are creating economic risks across Europe, with Cyprus particularly exposed because of its limited water resources and dependence on climate-sensitive sectors. Morningstar DBRS said successive heatwaves and below-average rainfall during the summer of 2026 had worsened drought conditions across parts of Europe, affecting agriculture, inland transport, industry and power generation.

Climate Risks Are Increasing Economic Costs

Droughts are becoming more frequent and severe worldwide, according to Morningstar DBRS. While the impact on the creditworthiness of most sovereigns remains limited for now, the agency said long-term economic effects will depend on how effectively countries adapt to more frequent and costly weather events.

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“As climate risks accumulate and droughts become more frequent and costly, it is critical to assess the various economic impacts,” said Adriana Alvarado, senior vice-president in Morningstar DBRS’ Sovereign Ratings Group. The agency considers whether extreme weather could damage national wealth, weaken financial systems or disrupt economic activity when assessing sovereign creditworthiness.

Cyprus Faces Exposure Across Several Sectors

Cyprus is particularly exposed through water availability, agriculture and tourism. A study by the Economics Research Centre of the University of Cyprus estimated that cumulative discounted GDP losses under a business-as-usual climate scenario could reach about €29 billion by 2050 and €162 billion by 2100, with tourism, financial services and agriculture among the most vulnerable sectors.

Under the same scenario, tourism losses were projected at about €3.8 billion by 2050, while agriculture could face GDP losses of €500 million. Both figures were lower under scenarios involving stronger climate action.

Water And Tourism Face Direct Pressure

Limited water resources and prolonged hot, dry periods can reduce agricultural output and increase pressure on water infrastructure. Tourism is also exposed as rising temperatures and extreme heat affect the traditional summer season.

“Climate, quality and digital data will determine tourism development over the next five years,” said Nejc Jus, research director at the World Travel and Tourism Council. He said destinations may need to extend shoulder seasons as hotter conditions affect visitor demand.

Climate Investment Remains A Concern

Cyprus’ Fiscal Council has warned that investment in climate adaptation and mitigation remains below the level required by the island’s exposure to physical climate risks. The council said those risks could increasingly affect public finances, households and businesses, while higher climate-related financial risks could influence borrowing costs and sovereign credit ratings.

Cyprus has also sought greater regional cooperation on climate adaptation. At an international climate conference in Nicosia earlier this year, the government called for closer coordination across the Eastern Mediterranean and Middle East.

The Morningstar DBRS assessment comes as Cyprus continues to face drought, water shortages and rising temperatures. Those risks affect several parts of the economy, particularly agriculture and tourism.