A series of domestic and external threats that could affect Cyprus’ public finances and economic outlook are identified in the Finance Ministry’s Fiscal Risk Report accompanying the 2027 state budget.
The report identifies 11 domestic and six external risks, ranging from the stalled Vasiliko LNG terminal and higher state operating costs to geopolitical instability, inflation, climate change and developments in major overseas economies.
Vasiliko among key domestic risks
Among the domestic risks, the Finance Ministry highlights the potential financial consequences of the impasse surrounding the Vasiliko LNG terminal project.
Risks associated with the project include the existence of a state guarantee on loans, the consortium’s failure to liquidate guarantees and the outcome of the international arbitration proceedings taking place in England.
The report also identifies rising government operating costs resulting from volatile energy prices as a potential threat to public finances.
Non-performing loans and state guarantees
Another risk involves loans granted in previous years through various public bodies and other financial organisations to individuals which subsequently become non-performing.
The potential activation of state guarantees could also create additional pressure on government finances.
Higher interest rates represent another risk because of their potential impact on consumption and investment, as well as the cost of servicing public debt.
The report additionally identifies pending court cases, pension fund deficits and negative financial performance by state organisations, state-owned enterprises and local authorities among the domestic fiscal risks.
Contracts entered into under Public-Private Partnerships and the financing requirements of the State Health Services Organisation, Okypy, are also included.
Missing climate targets could carry a financial cost
The Finance Ministry also warns that failing to achieve Cyprus’ national climate targets could result in additional expenditure.
Any deviation from the targets established under EU regulations governing binding annual reductions in greenhouse gas emissions by member states between 2021 and 2030, including amended Regulation (EU) 2023/857, could carry a fiscal cost.
Cyprus could potentially have to purchase CO2 emission allowances from other EU member states, with the final cost depending on the extent to which the Republic falls short of its targets.
EU compliance and foot-and-mouth disease
Further domestic risks include the possibility of fines for partial or complete failure to comply with the EU acquis.
The report also identifies the direct and indirect economic consequences of foot-and-mouth disease as a potential risk to the economy and state finances.
Geopolitical tensions among external risks
Turning to external risks, the report warns that geopolitical developments in the wider region remain a significant source of uncertainty.
Further instability could affect fuel and energy prices, tourism, trade and industry.
The report also identifies the possibility of an increase in migration flows, which could have secondary consequences for public finances.
Ukraine and Middle East add inflationary pressure
The government highlights inflationary pressures associated with the war in Ukraine and tensions in the Middle East.
The potential impact of the United States’ new tariff policy is also identified as a risk.
Other external factors include the possibility of an increased Cypriot contribution to the EU budget.
Climate change creates further fiscal pressure
Climate change presents risks beyond Cyprus potentially missing its emissions targets.
The report points to the potential fiscal consequences of natural disasters, including the need to compensate the primary sector following destructive events.
Additional government expenditure could also be required for infrastructure, prevention measures and emergency preparedness projects aimed at responding to the effects of a changing climate.
Overseas downturns could hit Cyprus growth
Negative developments in the economies of other countries are also identified as an external risk because of Cyprus’ exposure through several of its principal productive sectors.
A deterioration in key overseas economies could result in slower growth than currently forecast for Cyprus.
That could subsequently worsen major fiscal and economic indicators, including the budget balance, public debt and current account balance, while also increasing unemployment.
The report underscores the importance of prudent fiscal policy and measures supporting sustainable economic growth, as Cyprus navigates risks originating both within the domestic economy and from an increasingly uncertain international environment.
