Cyprus economy shows resilience, though geopolitical tension a threat to stability

The Cypriot economy continues to demonstrate notable resilience, but rising geopolitical tensions are increasing external risks to financial stability and call for constant vigilance and proactive measures, the Central Bank of Cyprus (CBC) said in its 2024 Financial Stability Report.

The report highlights a significant deterioration in the global geopolitical landscape in 2024, culminating in the escalation of tensions in the Middle East after US and Israeli airstrikes on Iran in June 2025. These events have intensified global uncertainty, renewed fears over energy security, and disrupted global supply chains.

“It is crucial to maintain strong capital buffers and integrate geopolitical, macroeconomic, and environmental factors into policy and governance strategies,” the CBC notes. Presenting the findings, the CBC’s Head of Financial Stability, Pani Karamanou, stressed that these measures are key to reinforcing the domestic financial system’s resilience and protecting it from future shocks.

The report points out that the Cypriot economy achieved strong growth rates in 2024. However, its high level of openness makes it more vulnerable to external shocks. Potential slowdowns in vital sectors like tourism and real estate could exert pressure on the financial system.

Meanwhile, the external environment remains volatile, marked by ongoing regional conflicts, growing trade tensions, and downward revisions to global economic forecasts for 2025. Financial markets remain fragile and sensitive to shifts in investor sentiment, increasing the risk of market turbulence and negative effects on asset valuations held by financial institutions.

On inflation, the CBC notes that the decline in price pressures and interest rates in 2024 improved financing conditions and the creditworthiness of households and businesses. Nevertheless, borrowing costs remain higher than before 2022, impacting more vulnerable borrowers.

The report highlights a continued reduction in the private debt-to-GDP ratio and a strengthening of household and corporate balance sheets, supported by higher real wages and increased deposits.

Regarding real estate, the market is stabilising with a slower pace of price growth. However, the sector’s heavy exposure within the financial system, combined with potential demand drops and price corrections, could affect asset quality and financial stability in the future.

The CBC also warns about the impact of climate change, including extreme weather events such as droughts and water shortages, on vital economic sectors. In addition, cyber threats are on the rise, demanding stronger operational resilience and constant vigilance. Between 2020 and 2024, cyber attacks on the EU financial sector increased by 200%, while in Cyprus, almost 13% of larger businesses were affected in 2024.

The Central Bank points out that despite the system’s overall strength, complacency must be avoided. About 62% of bank loans in 2024 were secured by real estate, with low loan-to-value ratios providing some protection against potential market declines.

Banks have continued to improve, with non-performing loans falling to historic lows and capital adequacy reaching record levels. However, the normalisation of ECB monetary policy could affect bank profitability, especially given their reliance on interest income. Legacy bad loan portfolios also continue to weigh on the system.

Lastly, the CBC stresses the growing importance of non-bank financial institutions in Cyprus, which help diversify the financial system but remain vulnerable to market shocks.

The CBC calls for constant supervision, early detection of systemic risks, and robust macroprudential policies to maintain stability. It also emphasises the need for financial institutions to support green transition efforts and strengthen digital security as critical strategies for future resilience.