CBC Governor: Cypriot economy consistently resilient despite challenges

The Cypriot economy continues to exhibit robust growth, despite facing persistent external challenges in a turbulent and uncertain global environment, Governor of the Central Bank of Cyprus, Christodoulos Patsalides, said, noting that Cyprus is well-prepared to sustain growth even in the face of challenges like climate change and geopolitical risks.

Patsalides was addressing the monthly members meeting of the Cyprus Shipping Chamber (CSC), on 6 January.

The Central Bank Governor said that the Cypriot economy has consistently demonstrated remarkable resilience and flexibility, clearly reflected in the recent upgrades by credit rating agencies to the “A” category, "further cementing its reputation in international financial markets".

"These upgrades underscore the growing confidence in Cyprus’s fiscal policies and the solid outlook for its economic and banking systems," he noted.

Patsalides added that improved fiscal performance has been a cornerstone of these positive developments, noting that public debt has been reduced significantly, declining from 114% of GDP in 2020 to 74% in 2023, highlighting disciplined financial management.

He said that projections from the Ministry of Finance indicate that this downward trajectory will continue, with public debt expected to fall below 50% of GDP by 2028. "This progress strengthens fiscal sustainability and enhances the country’s ability to respond to future challenges, reflecting a strong commitment to long-term economic stability", he pointed out.

Moreover, he noted that, according to the December 2024 projections of the Central Bank of Cyprus (CBC), economic growth for 2024 is expected to reach 3.7%, significantly higher than the projected Eurozone average of 0.7%. The expansion of productive sectors such as technology, trade, tourism, financial and professional services, shipping, and construction, has been a key driver of growth.

For the period 2025-2027, GDP is expected to grow by approximately 3% annually, driven primarily by a projected increase in domestic demand and, to a lesser extent, external demand, he added, since domestic demand is expected to be supported by a rise in private consumption due to the increase in real disposable household income and the continued resilience of the labour market.

He added that domestic demand will benefit from ongoing large-scale private non-residential investments, infrastructure projects aimed at supporting digital and green development, and other reform projects under the Recovery and Resilience Plan.

Regarding the shipping sector in particular, Patsalides said that Cyprus is considered as one of the main pillars of the Cypriot economy.

"The country’s maritime industry considerably contributes directly and indirectly to the country’s GDP. Based on 2023 data, the shipping sector ranks third with a share of 17.2% to the total value of exports of services, after the Information and Communication Technology sector, the financial services and the tourism sectors, with shares of 30.2%, 20.3% and 11.5% respectively," he noted.

The Central Bank Governor underlined that the sector managed to stay "focused and strong", despite the unprecedented challenges faced in the last few years, namely the covid pandemic, the wars in Ukraine and Gaza as well as the tensions in the Red Sea.

Furthermore, he said that unemployment has declined to 5% in the first nine months of 2024, compared to 5.8% in 2023. It is projected to remain at 5% for the full year and to fall further to 4.6% by 2027, approaching levels indicative of full employment. These figures, he noted, compare favourably to the euro area, where unemployment is forecast to stabilize at 6.1% by 2027.

On the prices front, inflationary pressures have eased significantly, the Governor noted, with inflation dropping to 2.2% in the first eleven months of 2024, compared to 4.1% in the same period of 2023. According to the CBC's December 2024 projections, inflation is expected to stabilize near the 2% medium-term target, reaching 1.9% in 2025, 2.1% in 2026, and 2.0% in 2027.

The Cyprus banking sector

Regarding the Cyprus banking sector, the Governor said that it has demonstrated tangible progress and resilience, with key financial metrics reflecting a strong and sound performance. A primary indicator of this strength is the solid improvement in terms of solvency, with the Common Equity Tier 1 (CET1) ratio increasing from 21.5% in December 2023 to 23.5% in September 2024, he added, noting that this increase marks the highest CET1 ratio in the Union, surpassing the EU average of 16%.

Additionally, he noted that the Non-Performing Loans (NPL) ratio has continued its positive downward trend. As of September 2024, the NPL ratio stands at 6.5%, improved from 7.9% in December 2023. Yet, he said, there is still some way to go, particularly considering that the average NPL ratio of the EU sector stands as of September 2024 at 1.9%. Furthermore, he said that the improvement within the Cyprus banking sector has not been homogeneous across all institutions, with certain banks lagging behind. These institutions must therefore accelerate their efforts to align with the sector-wide advancements, according to the Governor.

Patsalides said that profitability metrics have been robust, with the Return on Equity (RoE) reaching 23.2% in September 2024 as opposed of 11.1% of the EU average, he said and operational efficiency has improved as the cost-to-income ratio declined to 35.5%, a notable reduction from previous years and lower than the EU average of 53%.

Cyprus banks also exhibit some of the highest liquidity standings in the EU, with the Liquidity Coverage Ratio (LCR), as of September 2024 at 336%, compared to the EU average of 161% and minimum requirement of 100%. Furthermore, the Net Stable Funding Ratio (NSFR), which assesses the stability of a bank’s funding base, stands also high at 187%, surpassing both the EU average of 127% and the minimum regulatory requirement of 100%.

"The Cypriot banking sector is thus well-positioned to face potential market disruptions and continue driving economic stability," he stressed.

According to Patsalides, through the first 11 months of 2024, Cypriot banks granted €3.3 billion in new loans to households and non-financial corporations (NFCs), surpassing the already high €2.9 billion provided during the same period in 2023, with the Governor highlighting that a negative effect of a very liquid banking sector in a small country is the slow adjustment of interest rates in response to ECB monetary policy actions. "Banks must exhibit responsible pricing policies in the face of reputation risk and the need to support the competitiveness of the economy", he emphasised.

Regarding challenges the sector faces, Patsalides mentioned adapting to AI, mitigating cyber risks, addressing geopolitical uncertainties, and transitioning to a greener economy. Tackling these priorities is essential for sustaining the sector's positive trajectory and remains central to our supervisory agenda, he noted.

The Central Bank Governor concluded that the Cypriot economy has shown resilience and adaptability, supported by strong performance, prudent fiscal policies, and a stable financial system, with key contributions from banking and shipping. "As one of the pillars of our economy, the shipping sector continues to demonstrate global competitiveness and innovation, further strengthening Cyprus’s position as a leading maritime hub. Looking ahead, challenges like climate change and geopolitical risks demand strategic foresight, but Cyprus is well-prepared to sustain growth," he said.

(Source & Photo: CNA)