Cyprus’s economic and financial stability has been affirmed during the 17th post-programme surveillance mission conducted by the European Commission, the European Central Bank (ECB), and the European Stability Mechanism (ESM) from September 30 to October 7. However, the report, released on Tuesday, warns of significant risks stemming from geopolitical tensions and sector-specific vulnerabilities, requiring careful monitoring.
Strong Economic Fundamentals and Growth
The report highlights that Cyprus’s economic foundations remain robust, supported by prudent fiscal policies and a stable banking sector. Economic growth reached 3.7% year-on-year in the first half of 2024, driven by increased investment and recovering exports. Improved household purchasing power and rising savings rates have boosted private consumption. Inflation is expected to stabilize around 2% in the medium term, aligning with the ECB’s target, while unemployment is approaching its lowest levels in a decade.
Geopolitical and Sectoral Risks
Despite strong fundamentals, the report identifies vulnerabilities in sectors such as energy, tourism, and investment. Cyprus remains heavily dependent on energy imports and is insufficiently integrated into the European electricity market, leaving it exposed to fluctuating energy prices. Geopolitical tensions also threaten key industries, including tourism, which continues to recover from previous disruptions.
Fiscal Outlook and Infrastructure Concerns
Cyprus’s fiscal position is projected to remain strong, with a 3.5% budget surplus expected in 2024 and public debt-to-GDP projected to decline to 56.7% by 2026. However, delays in critical infrastructure projects pose significant risks. For instance, setbacks in the construction of the liquefied natural gas terminal at Vasiliko Bay could increase costs by up to 1% of GDP, while the Great Sea Interconnector project may temporarily strain public accounts. Rising expenditures in public wages, pensions, and healthcare also present challenges.
Banking Sector: Resilience and Challenges
The banking sector continues to show resilience, driven by declining non-performing loans (NPLs) and strong profitability. The Mortgage-to-Rent scheme, launched in 2023, has exceeded expectations, with initial property acquisitions anticipated by the end of 2024. However, smaller financial institutions still face challenges in managing legacy NPLs, with an average NPL ratio of 21%, and structural barriers to expanding lending remain a concern.
External Balances and Investment Risks
Cyprus’s current account deficit remains high, driven by import dependency and profit outflows from foreign-owned corporations. Although foreign direct investment (FDI) remains strong, much of it flows through Special Purpose Entities (SPEs), contributing minimally to domestic economic output or employment, raising concerns about the sustainability of the country’s economic model.
Emerging and Sector-Specific Risks
The report underscores vulnerabilities in the hospitality and real estate sectors, which collectively account for over 60% of total business lending. The hospitality industry remains susceptible to geopolitical and climate-related risks, while real estate prices are rising, with signs of overheating in areas like Limassol. Emerging threats, including climate risks, cyberattacks, and geopolitical tensions, further complicate the economic outlook.
Conclusion
While Cyprus’s debt servicing capacity remains solid, supported by long maturities and declining debt ratios, unresolved geopolitical and sectoral risks could undermine investor confidence. The first repayment to the ESM is scheduled for 2025, with annual repayments averaging €0.99 billion until 2031.
Source: www.stockwatch.com.cy