Transport and other business services sectors recorded smaller surpluses

A highly important indicator of the economy, the current account balance, remains exposed to geopolitical risks.

According to an announcement by Eurobank, the current account balance (CAB) continued to improve in 2025, as its deficit decreased by 1.8 percentage points (pp) of GDP compared to 2024, reaching 6.4%, continuing the correction of 1.5pp from its 15-year peak in 2023 (9.7% of GDP).

Last year’s improvement was mainly driven by the widening surplus in the services balance, which reached 25.2% of GDP — a new historical high — compared to 23.5% in 2024.

A mild reduction in the goods deficit, by 0.4pp of GDP, also improved the CAB. However, the goods deficit remains high at 19.5% of GDP.

By contrast, the primary income deficit widened further to 11.2% of GDP from 10.8%, reflecting a larger net repatriation of profits from foreign direct investments.

The secondary income balance remained slightly negative at 0.9% of GDP, marginally improved compared to the 1.0% deficit recorded in 2024.

The particularly strong services surplus reflects the strong upward momentum of key sectors of the Cypriot economy.

As noted, the positive external balance strengthened in intellectual property services, tourism, and financial services, reaching 5.3%, 5.7%, and 6.5% of GDP respectively, compared to 4.4%, 5.2%, and 6.1% in 2024.

On the other hand, transport and other business services recorded smaller surpluses, both at 2.1% of GDP, compared to 2.6% and 2.2% a year earlier.

In ICT services, which were the main driver of GDP growth during the 2021-2025 period, the already high surplus — 7.5% of GDP — remained unchanged.

The improvement in tourism is closely linked to last year’s record arrivals and inflation-adjusted tourism revenues, with tourist arrivals exceeding 4.5 million and real revenues surpassing €2.8 billion (in 2015 prices).

The strengthening of financial services reflects both the ongoing structural transformation of the sector through acquisitions and mergers, as well as the consecutive upgrades of the country’s credit rating, which led to Cyprus returning to the A rating category after 13 years in November 2024, boosting investor confidence.

The aforementioned slight improvement in the goods balance as a percentage of GDP reflects the positive denominator effect resulting from strong nominal growth in domestic output, rather than an actual correction in the trade deficit.

In fact, in value terms, the goods deficit widened by 2.5% in 2025 due to a 1.4% increase in imports and a marginal decline in exports (-0.2%).

Higher imports were mainly driven by petroleum products, which accounted for more than half of the increase (53.9% share), followed by pharmaceutical products (16.5% share).

The increase in petroleum imports is linked to the normalization of maritime trade flows through the Red Sea, which also enabled a particularly strong rise in Cypriot exports of refined petroleum products (+298.8%) due to stronger international demand.

According to Eurobank, higher petroleum exports offset the sharp decline in ship exports, limiting the overall deterioration in total goods exports to the previously mentioned 0.2%.

As for the outlook for 2026, last year’s improvement in the current account balance is expected to be constrained by prolonged geopolitical tensions in the Middle East.

Tourism’s exposure to these impacts will be significant, given that last year’s strong performance was mainly supported by increased arrivals from the EU (59.8% of the total increase) and Israel (33.1%).

As a result, a slowdown in European economic activity is likely to negatively affect tourism revenues, while regional instability will reduce travel demand from countries in the region.

The transport sector is also expected to be significantly affected by disruptions to key shipping routes and weaker global trade momentum. More broadly, increased uncertainty is expected to strengthen risk aversion and limit investment flows.

However, Cyprus has also benefited during previous periods of regional instability, such as during the Gaza war between 2023 and 2025, as it is perceived to carry significantly lower geopolitical risk than neighboring countries, combined with very positive medium- to long-term prospects.

Various impacts are expected on the goods balance from higher energy prices. Given Cyprus’ very high energy dependence on crude oil and the relatively inelastic nature of domestic energy demand, oil prices that are significantly higher than last year will worsen the trade balance.

At the same time, the strong upward momentum in exports of refined petroleum products observed in 2025 is not expected to continue, leading to weaker exports as well as reduced crude oil imports.

The net impact on the goods balance will depend on the relative responsiveness (elasticity) of domestic energy consumption and export demand to price changes.

Finally, weaker activity in transport could create incentives for asset sales in shipping and aviation during the second half of the year, supporting the goods balance.

Source: Brief