Banking Industry Country Risk Assessment: Cyprus

Cyprus has relatively close economic and financial ties with Russia, exposing the economy to fallout from the conflict in Ukraine. Indeed, Russia has been one of the main sources of tourist arrivals in recent years and Russian citizens represented a large share of the beneficiaries of Cyprus' now-defunct citizenship by investment program. In 2022, Cyprus' tourism industry completely lost Russian tourists. Furthermore, financial transactions with Russia, notably via special-purpose entities (SPEs), have been large in recent years and a slowdown would harm the business services sector. However, Cyprus does not import gas and is therefore not exposed to the direct effects of supply disruptions. Nevertheless, Cyprus' economy has been resilient to recent external shocks, and we expect economic activity to

...Cypriot banks remain more vulnerable than other European banks to economic risks. Banks managed to reduce NPEs to about 11.4% at end-May 2022, compared with about 30% at end-2019. However, the clean-up is not yet completed, and asset quality remains among the weakest in Europe. Although banks' direct exposure to Russia is limited, the effects of sanctions on Russia could somewhat affect Cyprus' economy and its banks, since it is an important economic partner for Cyprus. However, we expect deterioration to be manageable and credit losses to stand slightly above cyclical lows over the next two years (at about 110-95 basis points). As a small, open economy, Cyprus should remain relatively weighted toward tourism (10% of system loans) and real estate (14%). Private sector indebtedness will gradually decline but remain...

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