Cyprus economy endangered by geopolitical turmoil, global debt, inflation

Real estate exposure adds to global financial risk concerns

Heightened geopolitical instability and mounting global debt levels represent key risks to Cyprus’ financial stability, according to the Central Bank of Cyprus (CBC).

The CBC published its 2024 Financial Stability Report (FSR) on Wednesday, highlighting several medium-term threats to the Cypriot financial system.

These include global uncertainty, inflationary pressures, as well as the impact of climate change and cyber risk on financial institutions.

In a press conference held at the CBC’s headquarters in Nicosia, executive board member Evgenia Christodoulou said the event marked a step towards “establishing the annual publication of the Financial Stability Report as a regular institution to strengthen transparency and build trust between the Central Bank, the public and national institutions”.

She explained that “this initiative forms part of the CBC’s broader strategy to improve public understanding of financial matters in simple language and with clarity, particularly on issues that affect the stability and prosperity of the economy”.

The report, which includes an updated introduction to reflect developments as recent as June 2025, underscores the significant role of the CBC’s directorate of financial stability and resolution in maintaining a resilient financial system.

This includes monitoring systemic risks from sources such as technological disruption, macroeconomic volatility and the interaction between financial markets and the real economy.

In its assessment of 2024, the central bank said that the primary risks to financial stability arose from international political uncertainty, high inflation, and rising interest rates, alongside steep property price increases since 2022.

Although financing costs and inflation pressures eased during the second half of 2024, and property prices showed signs of stabilising, macroeconomic and geopolitical risks continued to intensify.

The report also warned that emerging risks related to climate change and cybersecurity are becoming increasingly significant both in Cyprus and across the European Union.

“Climate change introduces both physical risks, such as droughts and extreme weather events, and transition risks from adjusting to a low-carbon economy,” the report stated.

It added that these challenges place structural demands on financial institutions to adjust their business models, while changes in international climate policy, such as the US position on the Paris Agreement, amplify uncertainty and may slow green investment flows.

Digitalisation was also flagged as a growing area of vulnerability.

“Cybersecurity is a crucial factor for maintaining operational continuity and confidence in the system, especially given the increasing frequency of cyber-attacks in the EU,” the report stated.

Despite the risks, Cyprus’ financial system showed resilience in 2024. The country recorded one of the highest GDP growth rates in the euro area, its government credit rating was upgraded, and the banking sector continued to strengthen, particularly in terms of capital adequacy, liquidity and asset quality.

However, the central bank reiterated that credit institutions’ exposure to the real estate sector remains a vulnerability, even though market stabilisation has reduced the risk of overheating.

Non-bank financial institutions, such as insurers and pension funds, continued to support the real economy but remain more sensitive to volatility in global markets.

These institutions are especially exposed to shifts in asset valuations and changes in risk premiums.

External challenges were further exacerbated in 2025, as new protectionist trade measures announced by the United States increased global uncertainty.

Although the direct impact on Cyprus is seen as limited due to the goods-focused nature of the US tariffs, the report said that secondary effects may emerge if key trading partners are affected or if retaliatory measures escalate into a broader trade conflict.

“Such developments may heighten global risk aversion, affect asset valuations and tighten funding conditions for both government and private sectors,” the central bank said.

It also warned that “the EU continues to face competitiveness challenges, particularly when compared to the innovation capacity of the US and China”.

Public debt is another critical theme in the report. The CBC echoed IMF projections that global public debt could rise from 93 per cent of GDP in 2024 to nearly 100 per cent by 2030.

For advanced economies, the figure is expected to exceed 100 per cent, partly driven by increased defence spending and growing geopolitical tensions.

“Maintaining fiscal discipline and resilience becomes essential,” the report stressed.

In contrast, Cyprus continued to reduce its debt burden, reaching 65 per cent of GDP by the end of 2024, down from 74 per cent a year earlier.

The central bank stressed that maintaining this trajectory is vital to ensure strong fiscal buffers and long-term financial stability.

On digital assets, the CBC acknowledged that while the EU’s Markets in Crypto-Assets (MiCA) regulation came into full effect on December 30, 2024, crypto assets remain inherently risky.

The European Securities and Markets Authority (ESMA) recently reminded investors that MiCA does not provide the same level of protection as traditional investment products.

The CBC, alongside the European Central Bank (ECB), has consistently warned of the risks associated with cryptocurrencies, including high volatility, speculation, fraud, and inadequate oversight.

To address rising cyclical risks, the central bank increased the countercyclical capital buffer (CCyB) from 1.0 per cent to 1.5 per cent on January 14, 2025.

This move aims to strengthen the banking sector’s capacity to absorb losses and maintain credit flow to households and businesses during potential downturns.

In line with the ECB’s stance, the CBC is also advancing other macroprudential tools, including loan-to-value limits and debt-service-to-income caps, and annually sets capital buffers for systemically important banks.

Christodoulou underscored the importance of responsible banking practices and the need for strong corporate governance.

She said that “embedding non-financial risks, such as reputation and ESG concerns, into decision-making enhances the sector’s transparency and long-term stability.”

In her closing remarks, she warned that the escalation of geopolitical tensions in June 2025, including airstrikes by the US and Israel on Iran, has revived fears about energy security and global supply chains.

“The volatility observed in global oil prices increases the likelihood of renewed inflationary pressures in the near term,” she said.

Furthermore, she stressed that “while the Cypriot economy remains resilient, these developments elevate the external risks surrounding financial stability and highlight the need for continuous preparedness and proactive action across the entire financial system”.

“Strong capital buffers and the integration of geopolitical, macroeconomic and environmental factors into policy planning are essential pillars for safeguarding the stability of the Cypriot financial system in the years ahead,” Christodoulou concluded.