CONFLAGRATION IN IRAN - CONSEQUENCES FOR GLOBAL AND CYPRIOT ECONOMY - Filenews 8/3 by Andreas Charitou
The new geopolitical conflagration in Iran and the wider Middle East is already having a negative impact on the global economy: it starts as uncertainty in the markets, passes to energy prices and ends up as a pressure on the purchasing power of households.
For the Cypriot citizen, the question is practical. What does all this mean for prices, interest rates, inflation, the resilience of the economy and how ready is the state to react in a timely and targeted manner?
Why does uncertainty do the damage?
International experience shows that the damage results not only from actual energy shortages, but from how markets assess risk. That is why at first the picture is fluid. This explains why Brent rose from around $73 to $85, while Europe recorded strong increases in natural gas.
The critical point is not only Iran's role, but geography: the Strait of Hormuz, through which more than 30% of the world's maritime oil trade passes. So, the risk is not limited to Iranian exports but also extends to the wider flow of oil from Saudi Arabia, Iraq, Kuwait, the UAE.
A complete closure of the Straits is not required: It is enough to increase the risk that raises insurance premiums and transport costs, increasing industrial costs, which are ultimately partially passed on to the consumer.
If the crisis is prolonged, tourism and investment may be squeezed. At the same time, the rise in energy increases inflation and may make the European Central Bank (ECB) more cautious about further interest rate cuts, keeping borrowing costs more expensive, limiting growth. Finally, uncertainty is also reflected in international stock markets, with a shift to safer havens, such as gold.
What will judge the final extent of the damage?
The key question is how long the uncertainty will last and whether it will turn into a real disruption in energy supply. A key factor is the operation of the Strait of Hormuz, a hub channel for maritime crude oil exports from Iran, Iraq, the UAE, Saudi Arabia and Kuwait, with 75% heading to the Far East (China, Japan, India). China is one of the most exposed, absorbing the largest percentage of Iran's exports and receiving more than 1/3 of its sea imports through Hormuz.
The picture is aggravated if there are attacks on the energy infrastructure of other producers (Qatar and Saudi Arabia), because then the market does not price a real loss of production. Equally crucial is how quickly potential losses of about 2 million euros can be replenished. barrels per day from Iranian exports. Finally, OPEC's decisions to increase production play a role of valves.
The bottom line is that even small changes in the risk of crossing through Hormuz can cause disproportionate cost increases, with broader implications for the global economy.
How are households affected in Cyprus?
The immediate consequences can be seen in energy and fuel. The most important ones come late, when increased production costs are passed on to households through the prices of food, basic necessities and services, fuelling a new cycle of inflation: and inflation does not affect everyone equally: lower incomes spend a higher percentage on energy and basic goods, so they are disproportionately affected since the purchasing value of their money decreases more.
Another source of pressure is interest rates. If inflation rises, borrowing for mortgages and business loans will become more expensive, intensifying liquidity pressure and increasing the risk of defaults on servicing obligations.
Finally, if the tension is prolonged, the impact on tourism, investment and growth can be passed on to the real economy, affecting jobs and unemployment.
Are there winners?
In the short term, the 'winners' are usually the major producers and exporters of crude oil, such as the US (16%) and Russia (12%), as they benefit from rising prices.
In contrast, greater losses occur in countries with a high dependence on energy imports, particularly when flows from Hormuz are affected or there is exposure to Iran, such as China. Europe also remains vulnerable because its industrial competitiveness is particularly sensitive to energy costs: when prices rise, pressure on growth intensifies.
An armoured Cyprus with a stronger base
Cyprus is facing this crisis with much better macroeconomic data: strong GDP growth (3.5%), lower public debt (55%), high fiscal surplus (3.5%) and low inflation (0.8%), some of the best performers in the EU.
This gives the state fiscal space and credibility for well-designed policies to deal with external pressures.
The Cypriot economy, through more prudent economic management, has proven to be resilient to external shocks and is prepared to face this geopolitical crisis.
Will support measures for households be needed? This will depend on the intensity and duration of the crisis. If intervention is required, the competent ministry has the fiscal and institutional tools for targeted action, if conditions require it, with the aim of protecting the real economy.
How we strengthen resilience;
The ignition is a reminder that dependence on imported fossil fuels remains a source of constant danger. Therefore, the acceleration of domestic energy sources is not only an environmental choice but also a strategic defense against external pressures.
At the same time, the dependence on energy (fuel oil) and tourism shows the need to diversify the production model: digital transformation, strengthening of high-value services and incentives for investments in more sectors.
Enhanced social protection is also needed with automatic support mechanisms for vulnerable groups when indicators such as fuel and electricity prices exceed pre-defined thresholds.
The recent report of the Ministry of Finance states that corresponding specific reform and investment actions are being promoted, with resources drawn from the Recovery and Resilience Plan.
The crisis in Iran is a reminder but also an opportunity: with a clean energy plan, greater diversification and targeted protection of vulnerable groups, Cyprus can strengthen its resilience without sacrificing development and social cohesion.
* Ph.D., CMA (USA), FCPA (Aust) / Professor of Finance, University of Cyprus
http://www.ucy.ac.cy/~charitou.aspx
http://ssrn.com/author=33395
