Phanos Vladimirou: Cyprus' small and open economy makes it vulnerable to external shocks

Despite the fact that Cyprus' economy has displayed continued resilience to numerous external shocks in recent years, its small and open economy makes it vulnerable to such disturbances, according to Phanos Vladimirou, CFA, Research Analyst, at Athlos Capital.

In comments to CBN following the recent turmoil in the global markets and potential escalation of events in the Middle East, Vladimirou said the impact on Cyprus would primarily be felt on its tourism sector, foreign investments and energy prices. But these risks can be mitigated if the country continues to follow a prudent fiscal policy and reduce its debt.

“Recession fears sparked after weak US jobs data was released last week, along with some data showing that business activity growth in the US and Eurozone stalled,” he explained. “As a result, traders now expect both the ECB and the Fed to proceed with several rate cuts this year. These fears are further amplified by concerns over the potential escalation of the conflict between Israel and Iran, which could cause uncertainty in the region.”

So, how can this affect Cyprus? “Despite the fact that Cyprus' economy has displayed continued resilience to numerous external shocks in recent years, its small and open economy makes Cyprus vulnerable to such disturbances,” Vladimirou. “A global recession and geopolitical tensions in the region could directly affect the Cypriot economy, primarily through the tourism sector, which is vital for the country, and secondly due to foreign investments. Private consumption and exports could also be impacted due to the economic uncertainty. All these factors would negatively affect Cyprus’ economic growth leading to lower revenues for the country. In addition, another key potential vulnerability relates to Cyprus’ high reliance on imported oil and petroleum products. An increase in energy prices due to the conflict in the Middle East would push the country to pay more to cover its energy needs. Cyprus’s reliance on energy imports, alongside imports of consumption and investment goods, would contribute to the widening of the trade deficit in an environment of high energy prices.”

And what does he suggest? “The aforementioned risks could be mitigated if Cyprus continues to follow a prudent fiscal policy, producing fiscal surpluses and continuing to reduce its debt-to-GDP ratio. Cyprus needs to be ready to manage any exogenous risks by continuing to implement a prudent fiscal policy, reducing its debt, and wisely managing its significant cash buffer.”