At the 19th Annual Economist Summit, experts lauded the Cypriot banking sector as being in its strongest position over the past ten years, particularly in a session dedicated to the banking sector's response to heightened interest rates. They underscored the urgency of implementing the foreclosure framework to effectively address non-performing loans (NPLs).

Representatives from the ECB's Single Supervisory Mechanism (SSM), the European Stability Mechanism (ESM), and Moody's emphasized the resilience of the European banking sector despite recent challenges, including the pandemic, the Ukraine conflict, rampant inflation, an energy crisis, and escalating tensions in the Middle East.

Wim Van Aken, a senior adviser to the ESM's chief economist and mission chief for Cyprus's post-program surveillance, noted that despite economic headwinds, the euro area and Cyprus have shown economic resilience.

Cyprus, in particular, has demonstrated strong economic performance, with growth projections surpassing the euro area average. Inflation in Cyprus is expected to decline significantly in 2023, falling below the euro area's average.

Cyprus's fiscal prudence has created fiscal space, thanks to cautious energy support measures for households and a declining public debt. Van Aken attributed Cyprus's advantageous position to a decade's worth of reform efforts.

He highlighted that the Cypriot banking sector is at its strongest in ten years. Higher interest rates have enhanced earnings and solvency ratios, surpassing the euro area average, and asset quality has remained resilient.

Cypriot banks have significantly de-risked their balance sheets since the financial crisis, earning upgrades from rating agencies. Nevertheless, Van Aken emphasized that the high NPLs on bank balance sheets, compared to the EU average, and outside the banking system, continue to affect new lending opportunities and profitability.

The resolution of NPLs in Cyprus is crucially dependent on the effectiveness of the foreclosure framework. Concerns arise from legislative proposals potentially weakening this framework and from its lack of implementation.

On a positive note, Van Aken celebrated Cyprus's return to investment-grade status by all major rating agencies, acknowledging the efforts of the Cypriot people. However, he cautioned that maintaining this momentum requires continued fiscal responsibility, a stable financial sector, and ongoing reforms.

In the mid-term, Cyprus's focus on fiscal prudence and creating buffers could mitigate the expected economic slowdown. In the long-term, investments in digital technology and innovation are vital, as is early action on climate change to ensure economic resilience.

Simon Ainsworth, an associate managing director at Moody's, pointed out that persistent core inflation means central banks must maintain restrictive policies into the next year. Consequently, banks are expected to see a decrease in loan demand.

He acknowledged the resilience of the Cypriot economy, with Moody's projecting a 2.8% GDP growth next year. However, he cautioned that the small and saturated Cypriot banking sector may face limitations in long-term profit growth due to a small loan book and low fee income.

Ainsworth noted that Cypriot banks benefit from strong capital buffers and high-quality equity, with the Bank of Cyprus and Hellenic Bank showcasing robust capital ratios well above the minimum and euro average. Lastly, he predicted that the current profitability will peak next year but will likely diminish over time.