The Ministry of Finance’s new Fiscal Risks Report underscores that, despite solid headline numbers, several vulnerabilities could weigh on public finances in the medium term.

One of the biggest concerns relates to the Vasilikos LNG terminal. The government acknowledges potential fiscal exposure of more than €400 million in compensation claims linked to the troubled project, which has already faced delays and contractual disputes. Any resolution could require a substantial budgetary outlay, heightening fiscal pressure.

The public health sector also remains a major risk factor. The state-owned hospitals operator (OKYpY) continues to run deficits, and the law extending state financial support until December 2026 raises the risk that budgetary assistance will exceed original plans. If hospitals do not achieve financial balance, or if obligations under the General Healthcare System (GESY) are not fully absorbed by the Health Insurance Organisation, additional public funds may be required.

Legal exposure is another issue: Cyprus risks fines related to the EU’s Urban Waste Water Treatment Directive, with the report cautioning that non-compliance could translate into financial penalties from Brussels.

The Recovery and Resilience Facility (RRF) is also highlighted. Missing milestones could jeopardise access to grants. Although the European Commission has given a preliminary green light for Cyprus’s fourth payment of €75.9 million, the report warns that timely implementation is crucial to avoid forfeiting EU funds.

Finally, the broader economic environment adds uncertainty. Rising geopolitical tensions, global trade policy shifts, and inflation risks tied to energy and commodities markets may drive volatility in government borrowing costs. ECB monetary policy remains a key factor, as even modest rate adjustments can impact Cyprus’s debt-servicing burden.

Alongside these risks, the report points to notable fiscal improvements. Public debt fell sharply in 2024, reaching €21.83 billion or 65.3% of GDP, down from 73.6% in 2023. This decline was driven by strong surpluses and use of cash reserves. The preliminary general-government balance for the first half of 2025 shows a surplus of 1.6% of GDP, only slightly below target, with revisions expected once delayed RRF inflows are booked.

Revenue collection exceeded expectations in key categories, with income-tax receipts €102 million above plan and social-contribution revenues €85.8 million higher. These inflows are helping to keep the fiscal balance positive despite expenditure pressures.

International credit-rating agencies also show confidence. DBRS upgraded Cyprus to A (low) in March 2025, while Fitch and S&P reaffirmed A- and Moody’s A3 ratings, all with stable outlooks.

The state continues to manage refinancing risk with a strong liquidity buffer covering 9–12 months of needs, and surplus cash is invested in Treasury bills and deposits to help offset borrowing costs. Although 53.8% of public debt now matures within five years, yields on Cyprus’s bonds eased through late 2024 and spreads narrowed compared to euro-area peers.

Government guarantees remain contained at €1.35 billion, with most loans performing and only 9.8% classed as non-performing. Contingent risks from the asset-protection scheme (APS) linked to Hellenic Bank are judged manageable, with covered loan balances shrinking and most claims already offset by recoveries.

The private sector is also deleveraging. Household debt fell to 59.3% of GDP and corporate debt to 75.5% in 2024, bringing overall private-sector debt close to the EU scoreboard threshold. This trend supports financial stability and reduces contingent liabilities for the state.

Taken together, Cyprus enters the second half of 2025 with improved debt metrics, stronger revenues, and renewed international confidence. Yet the report stresses that health-sector financing, project-related litigation, EU compliance, and the maturing debt profile demand policy discipline to ensure the country remains on its downward debt path.