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Steady Growth and Strong Resilience in Cyprus’s Banking Sector

banking sector economic growth

Cyprus’s banking sector has shown remarkable resilience and steady growth amidst global uncertainties, with banks maintaining high liquidity coverage and profitability. The nation’s commitment to addressing non-performing loans and preparing for challenges like climate change and digitalization reflects a forward-looking approach to ensuring long-term stability and success.

What factors contributed to the strong growth of Cyprus’s economy in 2024?

Cyprus’s economy experienced robust growth in 2024, driven by:

  • Increased domestic demand, particularly private consumption and investments.
  • Rise in real disposable income for households.
  • Commitment to significant private investments.
  • Resilience against international sanctions and regional geopolitical conflicts.

Continuing Advances in Economic Growth

Cyprus’s economy demonstrated a robust growth rate in the first half of 2024, surpassing the predictions with a remarkable GDP increase. This achievement was largely due to heightened domestic demand, particularly in private consumption and investments. Factors such as the rise in real disposable income for households and the active commitment to significant private investments contributed to this economic upswing. The promising growth indicators come in the wake of the CBC’s 2023 report, highlighting the nation’s economic resilience.

The effects of the international sanctions against Russia appeared to stabilize, showing minimal influence on the financial and professional services turnover. The geopolitical conflicts in the Middle East, while ongoing, have had a limited impact on Cyprus’s economy. Former CBC governor Constantinos Herodotou affirmed that the economy continues to thrive, with GDP growth fortifying and inflation pressures subsiding.

Labour Market Trends and Forecasts

The labour market in Cyprus echoes the strength displayed in the GDP growth, with a notable reduction in the unemployment rate. This positive trend is expected to continue, with projections indicating a decline in unemployment to 5.3 percent by 2026. The robust job market, alongside the resilient economy, points to a future where full employment conditions are within reach.

Employment rates have risen and unemployment has fallen, showcasing the vitality of Cyprus’s labour market. This aligns with the positive GDP trajectory, suggesting a healthy and stable economic environment. The coming years hold promise for an even stronger job market, with conditions approaching what economists consider full employment.

Banking Sector: Stability and Profitability

Cyprus’s banking sector has displayed exceptional endurance, especially in facing the unforeseen challenges posed by global health crises and geopolitical tensions. The banks have maintained a liquidity coverage ratio that far exceeds the eurozone average, indicating a solid foundation to withstand potential financial disruptions. The Common Equity Tier 1 (CET1) ratio also stands well above European counterparts, affirming the sector’s resilience.

In terms of profitability, the CBC noted that the banks have benefited from increased lending rates and higher interest income due to their substantial liquidity reserves. Despite this rise in profitability, the CBC has made it clear that supervisory authorities will continue to endorse a cautious stance on dividend distribution, focusing on strengthening the banks’ capital adequacy.

Prioritizing Non-Performing Loans (NPLs)

The management of NPLs remains a central concern for the CBC, as it seeks to bolster the banking sector’s health and stability. An agreement with an international consortium aims to reduce the burden of NPLs more drastically, ensuring the financial system’s robustness against external economic and geopolitical uncertainties. The reduction of NPLs is particularly critical for large banks, which have benefited most from risk reduction strategies.

The CBC’s commitment to a balanced and comprehensive legislative framework for addressing NPLs is unwavering. This framework includes considering foreclosures as a last resort, with the overarching goal of safeguarding the financial and economic stability of Cyprus.

Challenges on the Horizon: Climate Change and Digitalization

The banking sector is also contending with emerging challenges like climate change and the evolving landscape of technology. The CBC emphasizes the need for collective action to mitigate the risks of climate change and integrate these considerations into the banks’ strategic plans.

On the digital front, the push for modernization brings its own set of risks, particularly cyber threats. Banks are encouraged to bolster their defenses against these risks, ensuring their internal processes and preventive measures are up-to-date and effective. This dual focus on environmental impact and technological advancement underscores the CBC’s holistic approach to navigating the sector’s future challenges.

What factors contributed to the strong growth of Cyprus’s economy in 2024?

Cyprus’s economy experienced robust growth in 2024, driven by increased domestic demand, particularly private consumption and investments, a rise in real disposable income for households, commitment to significant private investments, and resilience against international sanctions and regional geopolitical conflicts.

What are the labour market trends and forecasts for Cyprus?

The labour market in Cyprus has shown strength with a notable reduction in the unemployment rate. Projections indicate a further decline in unemployment to 5.3 percent by 2026, suggesting a future where full employment conditions are within reach.

How stable and profitable is Cyprus’s banking sector?

Cyprus’s banking sector has displayed exceptional stability and profitability, maintaining high liquidity coverage ratios and profitability. The Common Equity Tier 1 (CET1) ratio stands well above European counterparts, indicating resilience against financial disruptions. Despite increased profitability, a cautious stance on dividend distribution is maintained to strengthen capital adequacy.

What measures is Cyprus taking to address non-performing loans in the banking sector?

The management of non-performing loans (NPLs) remains a central concern for Cyprus, with efforts focused on reducing NPL burden significantly to ensure financial system robustness. A balanced legislative framework is in place to address NPLs, with foreclosures considered as a last resort to safeguard financial and economic stability.

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