Cypriot businesses and households have continued to improve their financial position, but growing geopolitical and economic uncertainty could weigh on business activity and financial stability, according to the Central Bank of Cyprus's Financial Stability Report.
The report notes that the private non-financial sector continued to reduce its debt burden in 2025, helping to lower vulnerabilities associated with previously high levels of private debt.
The sector's overall debt-to-GDP ratio fell to 119.7% at the end of 2025, moving closer to the eurozone average of 116.1%.
Business debt fell to 65.5% of GDP, well below the European Commission's reference threshold of 85%, while household debt declined to 54.2% of GDP, slightly below the Commission's 55% benchmark.
Lending reaches record levels
Improved balance sheets and a more favourable interest-rate environment supported borrowing activity during 2025.
New lending to domestic businesses reached a record €3 billion, while new household lending rose to €1.8 billion.
Despite the increase, banks maintained strict lending standards and continued to assess borrowers' repayment capacity carefully, helping to limit excessive credit risk and the creation of new non-performing loans.
Businesses face external risks
The Central Bank warned that domestic businesses remain vulnerable to external shocks stemming from an uncertain international environment and ongoing geopolitical tensions.
While developments in US trade policy are expected to have limited direct effects on Cyprus due to relatively low export exposure to the American market, indirect impacts could be significant.
Potential risks include:
- Higher energy prices;
- Disruptions to supply chains and transport networks;
- Slower growth among key trading partners;
- Weaker investor confidence;
- Greater global risk aversion.
The report warns that such factors could negatively affect business activity and ultimately financial stability.
Tourism, trade and property sectors most exposed
According to the Central Bank, companies operating in tourism, trade and real estate are particularly vulnerable to weaker external demand and rising operating costs, especially if geopolitical tensions in the Middle East intensify further.
These sectors also tend to carry higher debt levels and relatively lower cash reserves, making them more sensitive to deteriorating economic conditions.
By contrast, sectors such as:
- Information and communication;
- Professional, scientific and technical services;
- Transport and storage;
appear more resilient because of lower leverage and stronger deposit buffers.
Labour market supports households
The report says the resilience of the labour market continues to support household incomes.
Average and median earnings increased in 2025 at rates well above inflation, boosting purchasing power and improving debt-servicing capacity.
However, the gains were unevenly distributed.
Lower-income households recorded wage growth of 3.9%, compared with 7.1% among higher-income households, indicating that more vulnerable households benefited less from favourable labour market conditions.
Confidence weakens after Middle East tensions
The Central Bank also noted a deterioration in household expectations following the escalation of conflict in the Middle East.
Households increasingly expect worsening labour market conditions, lower savings levels and weaker overall financial wellbeing.
The report warns that if inflation pressures intensify and interest rates remain elevated, households with limited savings or higher debt burdens could face increasing financial strain.
Deposits provide a buffer
Despite heightened uncertainty, rising cash reserves are helping strengthen resilience among businesses and households.
Deposits held by domestic businesses increased by 17.5% in 2025, the fastest growth since 2018, while household deposits rose by 6.2%.
The Central Bank said these liquidity buffers provide important protection against future economic shocks.
