Post-Programme Surveillance Report: Cyprus, Autumn 2024

Overview

• The report is part of the European Economy Institutional Papers by the European Commission's Directorate-General for Economic and Financial Affairs.
• It assesses Cyprus's economic, fiscal, and financial conditions post-economic assistance program.
• Information and projections are based on data available until 31 October 2024.

Key Contributors

• Prepared under guidance from Declan Costello, Luc Tholoniat, among others.
• Contributions from staff of the ECB and the ESM were included.

Executive Summary

• 17th surveillance mission to Cyprus from 30 September to 7 October 2024.
• Macroeconomic outlook is strong; year-on-year growth at 3.7% in H1 2024.
• Fiscal outlook favorable with budget surpluses and declining public debt-to-GDP ratio.
• Banking sector shows resilience with high profitability and declining NPLs.

Macroeconomic Developments

• Strong investment and net exports drive economic growth.
• GDP growth forecast at 3.6% in 2024, tapering to 2.5% by 2026.
• Risks include geopolitical tensions and energy price volatility.
• Robust labor market; unemployment rate declining.

Public Finance Developments

• General government budget surplus projected at 3.5% of GDP in 2024.
• Revenue driven by social security, income taxes, and VAT.
• Public spending increased due to wages, health, and social security.
• Risks from large projects like LNG terminal.

Financial Sector Developments

Banking Sector

• High profitability sustained by net interest income.
• Strong capital adequacy; CET1 ratio at 22.5%.
• Low competition for deposits, high liquidity ratios.
• Steady lending activity; decline in NPLs and renegotiated loans.

Risks and Oversight

• Macrofinancial risks from household and NFC debt.
• Emerging risks from geopolitical, climate, and cybersecurity threats.
• High exposure to real estate, but no major deterioration observed.

KEDIPES and Reforms

• Ongoing mortgage-to-rent scheme and foreclosure process reforms.
• Limited role of capital markets; focus on banking for corporate funding.

Sovereign Financing and Capacity to Repay

• Debt-to-GDP ratio declining, projected at 56.7% in 2026.
• Low gross financing needs and favorable debt maturity profile.
• Strong market perception with credit rating upgrades.
• Scheduled ESM debt repayments from 2025 to 2031.

Annexes

• Main macroeconomic indicators and debt sustainability analysis included.
• Cyprus maintains low short and long-term fiscal sustainability risks.
• Structural reforms and fiscal measures key to sustaining economic stability.

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• Additional Resources: European Commission publications are available online.
• Contact Information: Directorate-General for Economic and Financial Affairs, European Commission.