Businesses operating in the trade, tourism and real estate sectors, as well as low-income households, remain the most vulnerable links of the Cypriot economy, in the face of geopolitical turbulence, inflationary pressures and increased energy costs.
Despite a significant improvement in corporate and household balance sheets and an increase in bank lending, the Central Bank of Cyprus warns that the uncertain international environment continues to pose risks to financial stability.
The Financial Stability Report points out that companies in these sectors are more exposed to a possible slowdown in external demand, to an increase in operating costs due to energy prices and to the impact that a further escalation of conflicts in the Middle East may cause.
At the same time, these firms maintain higher levels of borrowing and relatively tight cash reserves, which increases their vulnerability in the event of a deterioration in economic conditions.
On the other hand, companies operating in the fields of information and communication, professional, scientific and technical activities, as well as transport and storage are more resilient. These industries boast lower leverage and stronger cash reserves, enabling them to cope more effectively with potential external shocks.
Despite the risks, the financing picture remains very positive. The improvement in the balance sheets of enterprises and households, combined with the more favourable interest rate environment, led to a significant increase in new bank lending.
In 2025, new lending to businesses reached a record high of €3 billion, while new lending to households stood at €1.8 billion. The Central Bank clarifies that, despite the increased credit expansion, banks continued to apply strict lending criteria, carefully assessing the creditworthiness of borrowers and limiting the risk of new non-performing loans being created.
Concern for households
The report records that the resilient labour market continued to boost household incomes in 2025, with average earnings rising faster than inflation. However, the improvement was not uniform. Lower-income households recorded an increase in earnings of only 3.9%, compared to 7.1% for the higher income strata, which limits their ability to strengthen their financial resilience.
At the same time, following the escalation of the conflict in the Middle East, households' expectations about their future financial situation deteriorated. The Central Bank estimates that a possible resurgence in inflation and an increase in borrowing costs could put additional pressure, especially on households with high borrowing or limited liquidity.
A further increase in deposits, which act as an important liquidity cushion, is also a positive development. Business deposits increased by 17.5% in 2025, recording the highest annual rate since 2018, while household deposits strengthened by 6.2%, strengthening the resilience of the private sector in the face of potential future turbulence.
External risks
The report underlines that, although the direct effects of the United States' trade policy on Cyprus are expected to be limited, the indirect effects may be significant.
A possible increase in energy prices, new disruptions in supply chains, a slowdown in economic activity in key trading partners and a deterioration in the investment climate are key risks that could affect the Cypriot economy and consequently financial stability.
