Cyprus forecasts need to be revised down
DR. JIM LEONTIADES
The CIIM Business School
Every financial crisis brings with it its own surprises. This one is no different. Its impact has brought about not only economic disruption but unexpected shifts of economic power as different countries have been effected and reacted differently.
Russia: Prime Minister Vladimir Putin initially saw the financial crisis as bringing about a shift of economic power to the detriment of the West and particularly the US. His own reputation was derived from the fact that his reign had ushered in a much needed degree of economic stability and prosperity. Based on this newfound prosperity, much of it based on oil, Russia was able to once again assert itself on the international stage both economically and militarily. On the economic front it felt confident enough to pressure a number of foreign oil companies which it had first welcomed into the country. These pressures took a number of forms, including the expulsion of the chief executive of BP in Russia.
Then came the current financial crisis. The price of oil, which had been rising and predicted by Goldman Sachs to reach 200 dollars a barrel, plummeted on news that the financial crisis had expanded into the "real economy" bringing with it the threat of a global economic recession. This sharply reduced the demand for oil and the oil price.
Dollars quickly became scarce in Moscow. Capital fled the country as foreign investors along with many Russians citizens sought safe havens for their money elsewhere. The previously strong ruble was threatened with devaluation. Street vendors began selling it for dollars at below the official rate. The Russian Central Bank was forced to rescue the national currency. Billions of dollars worth of its foreign currency reserves have been spent in the past few weeks supporting the ruble's exchange rate. Given the great size of Russia's reserves (over 500 billion dollars), this is not yet a threat to the ruble's value. However, it is also clear that the crisis is not over.
On the basis its strong oil revenue, ambitious plans had been made for Russian expenditure on armaments and other public spending. On September 16 the Russian finance minister, Alexei Kudrin, indicated that the state budget was based on a future oil price of between $92 and 70 a barrel. Wherever the oil price may finally settle, the volatility of its price has demonstrated that it is a precarious basis for future planning. Russian plans may now have to take into account a greater need for foreign capital and foreign investment.
Iran and Venezuela: Other oil producing countries have also been affected by the crisis. Among the major oil producers, Iran and Venezuela have a large population relative to their oil income. They are largely dependent on oil for their foreign exchange. Any fluctuation in the oil price impacts immediately on their economies and national budgets. As in the case of Russia, both countries saw the initial stages of the crisis as strengthening their international position. The drop in oil prices has changed that.
China: China is a key player here. It is better placed than most to avoid the adverse impact of the financial crisis. It's vigorous economic growth was behind much of the increased demand for oil which occasioned the price rise of that commodity. But signs of strain are showing. Economic growth, while still very rapid, has slowed (to just over 9% annually). Over half of the country's toy producers have closed their doors, partly due to problems of product quality but also due to decreased demand in the West. If the impact of the crisis continues, as is most likely, China's growth may drop further. If so, we may expect that the price of oil will follow.
The Dollar: The "eye of the storm" started and remains in the United States, bringing with it predictions of the decline of capitalism and the U.S. economy in particular. One would have expected at least a decline of the dollar. Instead, it has risen dramatically in the past months against nearly all currencies. This has come as a surprise. Some analysts attribute the strengthening of the dollar to an expected drop in the "European interest rate", set by the European Central Bank. This would make Euros less attractive and contribute to a strengthening of the dollar. But this cannot be considered a satisfactory explanation, since the overwhelming opinion in financial circles is that the US interest rate is also set to drop. Apparently, the dollar still represents a safe haven. Whatever the reason, the impact of these developments on the economic power of the various players is substantial.
Cyprus: Here in Cyprus, our initial optimistic economic forecasts made at the beginning of the crisis have had to be revised downward. There is little doubt that they will have to be revised again and in the same direction. Housing, which just a few months ago many in the industry had declared to be healthy and immune from any downturn, has experienced a decline and is still vulnerable. We should all thank our lucky stars that the country is a member of the European Union.
The global nature of the crisis has reinforced the need for global cooperation. That may well be its most enduring political legacy.
