How the Middle East crisis could squeeze Cyprus

Tourism, shipping, investment, energy, inflation and household purchasing power in Cyprus are expected to be affected by the turmoil in the Middle East, with the scale of the impact depending on the intensity and duration of the conflict, according to economist Tassos Yiasemides.

Speaking to the Cyprus News Agency (CNA) on Wednesday, Yiasemides said it is possible that energy prices for households and businesses will rise, as electricity generation in Cyprus relies heavily on fossil fuels and imported supplies.

“The key issue is for the whole matter to be temporary,” said Yiasemides.

He pointed out that during the previous 12-day war, fuel price increases were temporary and could be managed in a similar way.

“This time, however, more countries are involved and Cyprus has to manage the events of recent days stemming from the attack on the British bases,” he stressed.

He added that “Cyprus is an open economy with a strong dependence on imports of goods, so broader disruption in global trade may lead to higher prices and delays in the receipt of certain products”.

“It should be assessed on a continuous basis what the economic impact will be and how the growth rate of the economy and the annual budget will be affected,” said Yiasemides.

Additionally, he warned that if the conflict lasts more than a few weeks or months, “Cyprus may see slower growth and pressures on the budget”.

He explained that extensive clashes in an energy-sensitive region raise concerns and negative consequences for both the global and European economy, as any disruption to the production and transport of oil and natural gas, which are the main energy raw materials, drives up prices.

“It is clear that a prolonged period of elevated oil and natural gas prices will lead to a period of price increases and inflationary pressures,” he said.

According to Yiasemides, beyond the problems in the Strait of Hormuz, through which 20 per cent of global oil trade passes, oil and gas production infrastructure is being affected, while many tankers remain anchored in the Persian Gulf, with insurance companies either refusing coverage or raising premiums.

“So beyond the price of fossil fuels, transport costs are also increasing,” he said.

He added that whenever the cost of importing oil and natural gas rises, this is expected to burden production and transport costs within Cyprus.

He reiterated that higher import costs are likely to translate into increased electricity prices, affecting both households and businesses.

Turning to households, Yiasemides warned that inflationary pressures, mainly due to higher energy costs and rising import prices, could hit household purchasing power, business profit margins and potentially influence the general level of prices and wages in the economy.

“At the same time, a prolonged rise in energy prices is expected to strengthen inflationary trends globally, with central banks being called upon to take fresh decisions to tighten monetary policy and possibly raise interest rates,” he added.

He also expressed concern about the shipping sector, saying it is expected to be affected in Cyprus, although the extent will become clearer in the coming weeks.

He referred to an announcement by Donald Trump that the United States would offer political risk insurance for ships passing through the Persian Gulf at favourable cost and, if deemed necessary, provide naval escorts in the Strait of Hormuz.

“We are waiting to see whether the American President will release reserves from US stockpiles if he sees prices rising rapidly, an increase that is certainly beneficial for Russia, which exports significant quantities of oil via pipelines to India and China,” he added.

Yiasemides also highlighted concerns for the tourism sector, particularly following incidents at the British bases and flight cancellations to and from Cyprus.

“Geopolitical instability, especially if international media intensify the sense of risk for the region, may reduce travellers’ confidence in visiting Cyprus,” he said.

He further stated that tourism demand is sensitive to perceived safety and that any negative image could affect bookings and revenues.

“Careful management is needed since we may not be in a period of peak tourism intensity, but it is an important period in terms of booking flows,” he added.

Moreover, Yiasemides said that geopolitical uncertainty generally reduces business and investment activity worldwide.

“So in Cyprus, the flow of foreign investment is expected to be affected, as investors seek safety in more stable markets,” he said.

“Many investors may postpone their plans until the situation stabilises,” he concluded.