Central Bank has warned that private sector debt stability remains fragile and vulnerable to negative external developments, despite continued reductions in overall debt levels.
The Central Bank’s 2024 Financial Stability Report states that potential decreases in domestic economic activity or deteriorating financing conditions could negatively impact existing debt servicing, increase non-performing loan levels, and restrict access to new borrowing for vulnerable households and businesses.
Private sector debt from domestic households and non-financial corporations continued declining as a percentage of GDP during 2024, reaching 134.8% of GDP in December 2024, though remaining above the eurozone average.
The debt-to-GDP ratio declined to historically low levels primarily due to significant nominal GDP increases over the past decade rather than net repayments, making the private sector vulnerable to potential economic activity slowdowns caused by global macroeconomic developments and geopolitical tensions.
“The continuing high level of debt burdening private non-financial sector balance sheets, particularly vulnerable households and businesses, can create challenges in repaying obligations,” Central Bank technicians noted. “Any deterioration in economic conditions could negatively affect borrowers’ ability to continue servicing obligations, increasing the risk of converting these loans into new non-performing exposures.”
The Central Bank characterised high private debt for both households and non-financial corporations as a primary vulnerability source for financial stability, limiting loan repayment capacity during negative macroeconomic fluctuations.
Despite progress in specific indicators including income, private sector loan repayment capacity, corporate leverage ratios, and household debt-to-income ratios during 2024, Cyprus’s private non-financial sector continues experiencing high debt levels and structural vulnerabilities.
Small and medium enterprises’ dependence on the banking system for financing, high leverage levels, and legacy non-performing exposures limit capacity for absorbing new economic shocks, according to the report.
Potential macroeconomic environment deterioration, combined with strengthening inflationary pressures and possible interest rate increases due to geopolitical or financial pressures, could reverse private debt’s declining trajectory and intensify financial stability risks.
The property sector remains significant for Cyprus’s economy regarding both economic activity and financial stability. Property market risks for financial stability remain substantial and require continuous monitoring, with the sector’s direct connection to real economy developments making it particularly vulnerable to economic changes.
Financial sector exposure to property represents a vulnerability for financial stability, particularly in scenarios involving property price decreases. Despite relatively low direct exposure from credit institutions and credit-acquiring companies to property markets, high indirect exposure through loan portfolios constitutes significant vulnerability.
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