Middle East tensions pose risk to Cyprus economy

Cyprus’ current account balance continued to improve in 2025, although ongoing geopolitical tensions in the Middle East remain a significant risk for the economy’s external position, according to Eurobank research economist Michail Vassileiadis

According to the analysis provided by the Eurobank economist, Cyprus’ current account deficit narrowed by 1.8 percentage points of GDP compared with 2024, reaching 6.4 per cent of GDP.

This extended the 1.5 percentage point correction recorded after the 15-year peak deficit seen in 2023, when the current account shortfall reached 9.7 per cent of GDP.

The improvement was driven primarily by a further expansion in the services surplus, which rose to a historic high of 25.2 per cent of GDP, up from 23.5 per cent in 2024.

The analysis stated that a modest narrowing of the goods deficit by 0.4 percentage points of GDP also contributed to the improvement, although the deficit remained elevated at 19.5 per cent of GDP.

By contrast, the primary income deficit widened further to 11.2 per cent of GDP from 10.8 per cent, reflecting increased net expatriation of direct investment profits.

The secondary income balance remained slightly negative at 0.9 per cent of GDP, marginally improved from negative 1.0 per cent in 2024.

The record-high services surplus reflected broad-based strength across key sectors of the economy.

According to the analysis, surpluses increased in intellectual property services, tourism and financial services, reaching 5.3 per cent, 5.7 per cent and 6.5 per cent of GDP respectively.

These figures compared with 4.4 per cent, 5.2 per cent and 6.1 per cent in 2024.

In contrast, transport and other business services recorded weaker surpluses of 2.1 per cent of GDP each, compared with 2.6 per cent and 2.2 per cent a year earlier.

Meanwhile, the surplus in ICT services, described as a major contributor to GDP growth between 2021 and 2025, remained stable at 7.5 per cent of GDP.

The report linked the improvement in tourism directly to record-high arrivals and inflation-adjusted tourism receipts.

Tourist arrivals exceeded 4.5 million, while real tourism revenues surpassed €2.8 billion in 2015 prices.

The strengthening of financial services was attributed to the economy’s ongoing structural transformation, including consolidation through mergers and acquisitions.

The analysis also pointed to successive sovereign credit rating upgrades, culminating in Cyprus’ return to A-tier status after 13 years in November 2024, which it said had supported investor confidence.

The limited improvement in the goods balance as a share of GDP was described as mainly the result of stronger nominal output growth rather than a meaningful correction in trade dynamics.

In value terms, the goods deficit widened by 2.5 per cent in 2025.

This deterioration was driven by a 1.4 per cent increase in imports and a marginal 0.2 per cent decline in exports.

Higher imports were primarily attributed to petroleum products, which accounted for more than half of the annual increase, or 53.9 per cent.

Pharmaceutical products accounted for a further 16.5 per cent of the increase in imports.

The rise in petroleum imports was linked to the normalisation of maritime trade flows through the Red Sea.

At the same time, this normalisation also supported a sharp increase in exports of refined petroleum products, which surged by 298.8 per cent.

According to the analysis, this increase offset the steep decline in ship exports and helped contain the overall deterioration in goods exports.

Looking ahead, Eurobank warned that the recent improvement in the current account could come under pressure if geopolitical tensions in the Middle East persist.

The report described tourism as particularly exposed to these risks.

It explained that last year’s strong tourism performance was underpinned by increased arrivals from the European Union, which accounted for 59.8 per cent of the total increase, and Israel, which contributed 33.1 per cent.

According to the analysis, a potential slowdown in European economic activity would likely weigh on tourism revenues, while regional instability could further weaken travel demand.

The transport sector was also identified as vulnerable to disruptions in key shipping routes and weaker global trade dynamics.

More broadly, the report said heightened uncertainty is expected to reinforce risk aversion and constrain investment flows.

However, the analysis also noted that Cyprus has historically benefited from safe-haven inflows during periods of regional instability.

It specifically referred to the war in Gaza between 2023 and 2025, during which Cyprus experienced inflows particularly into the real estate sector.

Higher energy prices are also expected to have mixed effects on the goods balance, according to the report.

The analysis stated that Cyprus’ heavy dependence on crude petroleum imports and the relatively inelastic nature of domestic energy demand mean that substantially higher oil prices would likely worsen the merchandise trade balance.

At the same time, the exceptional strength observed in refined petroleum exports during 2025 is not expected to continue.

This implies a possible moderation in both related exports and crude oil imports.

According to the report, the net effect on the goods balance will depend on the relative responsiveness of domestic energy consumption and export demand to price changes.

Finally, the analysis said weaker transport activity could encourage asset sales in the shipping and aviation sectors, potentially supporting the goods balance later in the year.