Filenews 27 November 2024
The economic and financial stability of Cyprus was confirmed during the 17th post-programme surveillance mission by the European Commission and the European Central Bank (ECB), with the participation of the European Stability Mechanism (ESM), from 30 September to 7 October. However, the report published on Tuesday highlights significant risks in individual sectors and from the geopolitical situation, stressing the need for vigilance.
Cyprus' economic foundations remain strong, supported by strict fiscal discipline and a resilient banking sector. Nevertheless, the country faces risks in its energy, tourism and investment model, which are exacerbated by geopolitical tensions and uncertainties related to climate change.
Economic growth accelerated to 3.7% year-on-year in the first half of 2024, mainly on account of strong investment and a recovery in net exports. Household purchasing power and saving rates continue to improve, supporting private consumption. Inflation is expected to stabilise at around 2% over the medium term, in line with the ECB's price stability objective. Unemployment is approaching its lowest level in a decade.
Geopolitical and sectoral risks
The report notes that geopolitical tensions pose a significant risk to the economy. Potential disruptions to supply chains and rising production costs could affect critical sectors, such as tourism, which is recovering from previous crises. Moreover, Cyprus' energy dependence on fossil fuels and its limited integration into the European electricity market make it vulnerable to changes in energy prices.
Fiscal performance and challenges
Cyprus' fiscal profile remains strong, with a surplus of 3.5% of GDP projected for 2024, while public debt as a percentage of GDP is expected to decline to 56.7% by 2026. However, concerns are being raised about delays in major infrastructure projects, such as the Vasilikos liquefied natural gas terminal, which could burden the budget with up to 1% of GDP. Also, the increase in public spending due to wages, pensions and health care is intensifying the pressure on public finances.
Resilience and challenges of the banking sector
The Cypriot banking sector is resilient, with stable profitability and a reduction in non-performing loans (NPLs). Nevertheless, less significant institutions (LSIs) continue to struggle to manage their NPLs, with an average rate of 21% in June, unchanged from December.
The limited appetite for new lending is also a structural obstacle. Cypriot banks held 32% of assets in deposits with the central bank and 42% were loans and advances, compared to the EU average of 12% and 63% respectively.
Interest rate hikes have led to loan renegotiations, although repayment capacity remains strong.
External balances and investment concerns
The report says the current account deficit remains high, reflecting dependence on imports and significant profit outflows from foreign companies. While foreign direct investment inflows are strong, a large part of it is for Special Purposes with a limited contribution to domestic output and employment. This raises concerns about the sustainability of Cyprus' economic model and potential vulnerabilities to aggressive tax planning.
The risks from geopolitical tensions, climate change and cyberattacks are intensifying. Banks are investing heavily in their cyber-attack infrastructure, while physical and transient risks associated with climate change are closely monitored.
Cyprus maintains a strong debt servicing capacity, but geopolitical uncertainties and sectoral vulnerabilities require continued attention to maintain investor confidence. The first repayment to the ESM is scheduled for 2025, with annual repayments averaging €0.99 billion until 2031.
CNA
