Cyprus

major macro economic indicators*

(e): Estimate (f): Forecast

RISK ASSESSMENT

Solid growth underpinned by an acceleration in tourism and European funding

Economic activity in Cyprus was resilient to the headwinds generated by the war in Ukraine and is expected to strengthen in 2024 and 2025 to remain above the eurozone average (Coface forecasts 1.5% for 2025). Growth will be underpinned by household consumption. Household purchasing power will continue to improve thanks to the easing of inflationary pressures and an unemployment rate on a downward trajectory (4.6% in Q2 2024, its lowest level since the financial crisis). In addition, tourism will continue to strengthen thanks to the recovery in confidence and disposable income among European households. Although international arrivals in Cyprus in the summer of 2024 were still 2% below pre-pandemic levels, the tourism sector has managed to overcome the halt of Russians to the island – Russia represented 20% of tourist arrivals in 2019 – and Ukrainians thanks to the increase in the number of visitors from Western Europe (mainly from the UK, which accounted for 34% of arrivals in H1 2024). Israelis now represent the second largest tourist market (10% of arrivals in H1 2024), but the Middle East conflict has had a modest impact on the sector to date. In addition, the professional and financial services sectors are heavily dependent on local subsidiaries of Russian companies exposed to sanctions. Although Cyprus has little direct exposure to Russian energy supplies, the island nation is heavily dependent on oil imports and therefore remains vulnerable to global energy shocks, including the risk of escalating tensions in the Middle East.

The investment outlook should brighten with the easing of financial conditions, but this will remain very gradual. These should be fuelled in particular by the rise in investment in construction, driven by FDI, with many large-scale projects in excess of EUR 8 billion according to the Association of Large Investment Projects (infrastructures, new marinas, commercial and residential properties driven by local and international demand, etc.). Although the country benefits from substantial European aid in the form of NGEU funds (5% of 2020 GDP), the timetable for disbursing these funds has been slowed by the inability to implement reforms on time. By the summer of 2024, Cyprus had received only 22% of the EUR 1.2 billion in approved stimulus funds (EUR 1 billion in grants and EUR 200 million in loans), so the remaining bulk should be disbursed in 2025-2026.

Reduced sovereign and banking risk thanks to increased tax revenues

Although Cyprus’ debt exceeds the EU’s budgetary rules, robust growth, particularly with the increase in tourism receipts, should continue fueling the budgetary surplus. The gradual withdrawal of the support measures adopted during the energy crisis, combined with the increase in revenues generated by solid consumption sustained by rising wages (6.6% in 2023), will contribute to this. The combination of strong nominal GDP growth and successive budget surpluses will continue to reduce the debt ratio. With manageable financing requirements (estimated at 4-5% of GDP per annum), solid liquidity reserves representing 10% of GDP and more than two-thirds of outstanding fixed-interest debt, sovereign risk is reasonably contained. The health of the banking system, while still bearing some of the scars of the eurozone crisis, is also on a positive trajectory. This is true both on the assets side, where the NPL ratio reached 6.9% in June 2024 (9% a year earlier), as well as on the liabilities side, with the banking system recording a CET 1 capital ratio of 23.4% in Q1 2024.

The current account deficit will remain high because of the deficit in goods and primary income. The country's dependence on imports, exacerbated by strong domestic demand in terms of both consumption and investment, will result in a trade deficit equivalent to 24% of GDP in 2023. In addition, the prosperity of the growing number of foreign service companies on the island is generating increased repatriation of profits, which lies at the root of the significant income deficit (10%). This is offset by a surplus on services (23%), which will be confirmed by the strength of service exports, particularly for tourism, financial services and IT services. However, the current account deficit could narrow as commodity prices moderate and the profitability of foreign financial institutions returns to normal. Furthermore, this current account deficit is not overly worrying as it is financed by the inflow of foreign direct investment (13% of GDP in 2023), particularly in property, partly financed by the reinvestment of profits. Furthermore, the activity of the many special purpose entities domiciled in Cyprus, particularly in shipping and finance, alters the external statistics through their investments (ships, licences, etc.) which are mainly financed by foreign commitments. However, these entities, which have little connection with the domestic economy, are essentially excluded from the analysis.

An increasingly fragmented political landscape as tensions with Turkey persist

Since his election in February 2023, President Níkos Christodoulídes, an independent, has been forced to govern with a minority government. The country’s political fragmentation was underscored and increased in the European elections of June 2024 following the poor performances of the two main parties supporting the government: the centrist Democratic Party (Diko) and the centre-left Movement of Social Democrats (Edek), which garnered just 15% of the vote between them. As legislation is passed on a case-by-case basis in the absence of a majority, these results are likely to make negotiations with the opposition parties even more difficult. Plagued by these governance problems, Cyprus has been slow to take advantage of EU funds due to delays in implementing the reform targets (tax collection, energy, health, education and transport infrastructure) needed to access its allocated share.

In addition, the island of Cyprus is divided between the Republic of Cyprus (RC), which is allied to Greece, is a member of the eurozone, and which controls the southern half of the island, and the Turkish Republic of Northern Cyprus (TRNC), which controls the north and is recognised only by Turkey. While a ceasefire has existed since 1974 following the creation of a green line with the presence of UN forces, ongoing geopolitical tensions between Greece, Cyprus and the EU, on the one hand, and Turkey, on the other, have strained this situation. Turkey's maritime claims and the TRNC in the Eastern Mediterranean, including the exploration of major gas deposits, is a crucial sore point. Since 2018, Turkey has repeatedly sent exploration vessels escorted by military ships into the disputed waters. Although there have recently been some signs of détente, the path to a lasting solution is unlikely at present. The Republic of Cyprus remains a key member of the EastMed Gas Forum, an alliance with Egypt, Greece, Israel, Italy, Jordan and Palestine, aimed at fostering a regional gas industry.

Last update : September 2024

Payment

Bills of exchange are used by Cypriot companies in both domestic and international transactions. In the event of payment default, a protest certifying the dishonoured bill must be drawn up by a public notary within two working days of the due date.

Although cheques are still widely used in international transactions, in the domestic business environment they are customarily used less as an instrument of payment, and more as a credit instrument, making it possible to create successive payment due dates. It is therefore a common and widespread practice for post-dated cheques to be endorsed by several creditors. Furthermore, issuers of dishonoured cheques may be liable to prosecution provided a complaint is lodged under both civil and criminal procedures.

Instead of promissory letters or notes, which are not usually used as a security or payment method in Cyprus, a written acknowledgement of debt may be obtained, which can be used as essential evidence during the hearing trials in a later stage to the court.

SWIFT bank transfers, well-established in Cypriot banking circles, are used to settle a growing proportion of transactions, and offer a quick and secure method of payment. In addition, SEPA bank transfers are becoming more popular as they are fast, secure, and supported by a more developed banking network.

Debt Collection

Amicable phase

Before initiating proceedings in front of the competent court, an alternative method to recover a debt is to try to agree with the debtor on a settlement plan. Reaching the most beneficial arrangement is usually achieved by means of a negotiating process.

The recovery process commences with the debtor being sent a final demand for payment by recorded delivery mail, reminding him of his payment obligations, including any interest penalties as may have been contractually agreed – or, failing this, those accruing at the legal rate of interest.

Interest is due from the day following the date of payment stipulated in the invoice or commercial agreement at a rate, unless the parties agree otherwise, equal to the European Central Bank’s refinancing rate, plus seven percentage points.

Legal proceedings

Introduced in 2015, cases with small claims (no more than EUR 3,000) can follow a simplified and faster procedure. To engage such a procedure, the creditor must possess a written document substantiating the claim underlying his lawsuit, such as a Statement of Account, an acknowledgement of debt established by private deed, the original invoice summarising the goods sold and bearing the buyer’s signature and stamp certifying receipt of delivery, or the original delivery slip signed by the buyer.

For all other claims, the usual procedure is followed:

The creditor files a claim with the court, who serves it to the debtor via a private bailiff. A writ of summons cannot be in force for more than 12 months from the day of its issue, unless renewed by a court order.

On service of the writ of summons, the defendant has ten days to file an appearance, and then a defence must be filed within 14 days. If the defendant fails to file an appearance within the prescribed period, the claimant can apply for and obtain a default judgment. A defendant can file an appearance outside the prescribed time limit to block the issue of a judgment in default.

If the defendant files an appearance but not a defence, the claimant can file an application for issuance of judgment without a full hearing being conducted. Additionally, where the defendant files an appearance or a defence to a specially endorsed writ of summons, the claimant can, where appropriate, apply for a summary judgment on the grounds that there is no defence to the action.

When a defence is filed, the claimant can file a reply to the defence within seven days from its service. If the defendant submits a counterclaim, the claimant must file a reply to the defence and a defence to the counterclaim within 14 days from its service.

Once the pleadings are closed, the claimant has 90 days to issue and file a summons for directions together and in accordance with form 25 requesting the issuing of specific directions by the court (order 30, rule 1 (a) and (b), CPR).

Once all procedures are concluded, the case will be set for hearing and, depending on the court schedule, it may take more than three years from the date of filing to be heard. At the hearing, the claimant must prove its case on the balance of probabilities by adducing sufficient and admissible evidence regarding all allegations that are not admitted by the defendant. The same applies for the counterclaimant. Following the conclusion of the hearing and the advocates' final addresses, a judgment is issued.

Enforcement of a Legal Decision

Enforcement of a domestic decision may begin once the final judgment is made. If the debtor fails to satisfy the judgment, the latter is enforceable directly through the attachment of the debtor’s assets.

The judgment creditor has several options on how to proceed with execution of the judgment debt. Under the Civil Procedure Law, every court's decision ordering the payment of money can be enforced through many methods such as:

• A writ of execution for the sale of movables.
• A writ for sale of immovable property or registration of a charging order over the property.
• A writ of sequestration of immovable property.
•  An order to the judgment debtor to make payments over the debt on a monthly basis. The amount and dates of the payments will be determined by the court according to the financial position of the judgment debtor etc.

For foreign awards rendered in a European Union member-state, Cyprus has adopted advantageous enforcement conditions, such as EU Payment Orders or the European Enforcement Order. For decisions rendered by non-EU countries, they will be automatically enforced according to reciprocal enforcement treaties. In the absence of an agreement, exequatur proceedings will take place.

Insolvency Proceedings

Restructuring proceedings

This procedure aims to help debtors restore their credibility and viability, and continue their operations beyond bankruptcy, by aiming to negotiate an agreement between the relevant debtors and creditors. During this procedure, claims and enforcement actions against the debtor may be stayed, but the court will appoint an administrator to control the debtor’s assets and performances. The reorganization process starts with the debtor’s submission of a plan to the court, which conducts a judicial review of the proposed plan, while a court-appointed mediator assesses the creditors’ expectations.

Liquidation

The procedure commences with an insolvency petition either by the debtor or its creditors. The court appoints an administrator as soon as the debts are verified. In addition, a Pool of Creditors (three members representing each class of creditors) will be given the responsibility of overseeing the proceedings, which terminate once the proceeds of the sale of the business’ assets are distributed.