“This was the last thing we needed,” said Mahmoud Abdel-Fattah, a souvenir shop owner in Aswan in Upper Egypt, as soon as he heard of the Russian Metrojet plane disaster. He knew that at stake were not only the lives of 224 people, but also Egypt's whole tourism sector, a lifeline of hard currency to the Egyptian economy. The tourism sector earned around $7 billion in fiscal year 2014-2015. While this is an important contribution to Egypt's coffers, it is well below the sector's potential. In 2010, tourism earned a record $11 billion. The extent to which the Russian plane disaster will now affect the performance of the sector remains to be seen. “It is too early to judge,” says Adela Ragab, an advisor to the minister of tourism. “We still have to see if this will cause a temporary or prolonged effect, depending on the findings of the investigations.” British and American intelligence sources claim that the plane was downed by a bomb, but the official investigation is still underway. Several countries have issued travel advisories warning their citizens not to travel to Sharm El-Sheikh, while Russia has told its nationals to not even travel to Egypt. Advisories against travel to Sharm El-Sheikh alone is worrying, said Ragab. The beach resort is responsible for about 30 per cent of Egypt's tourists and most of the visitors are citizens of the UK and Russia. Egypt received around three million Russian tourists last year. As for the impact of the tragedy on tourism in the rest of the country, Elhami Al-Zayat, head of the Egyptian Federation of Tourism Chambers, said that thus far there has been no change in reservations. The effect on Sharm El-Sheikh is also not clear yet, he said. Al-Zayat added that the tourists currently there are behaving calmly, and many do not want to leave on the evacuation flights. Everybody has something to lose, not just Sharm El-Sheikh, he said. Many tour operators have investments in Egypt in the form of hotels and other facilities, and have pre-existing contracts with airline companies to transport tourists in the coming months, Egypt being a top winter destination for Europeans. He does not believe that anywhere else in the region can compete with Sharm El-Sheikh in terms of warm weather, the quality of the beaches and value for money. Tour operators may redirect their clients to other destinations in Egypt, such as Hurghada and Upper Egypt. He said he expects tourists to return to Sharm El-Sheikh by Christmas. Until then, however, any drop in numbers, even if temporary, will be sorely felt, given the number of Russian tourists visiting the resort, Ragab said. Even before the crash, Egypt was facing a dollar crunch, with the country's international foreign reserves standing at $16.4 billion at the end of October, down from around $18 billion two months earlier. But it is not only a matter of cash, the fall-out from the plane crash also threatens to put thousands of Egyptians who work in the tourism industry out of a job. Unemployment currently stands at almost 13 per cent. Measures taken by the Central Bank of Egypt (CBE) to prevent the depletion of dollars are affecting the manufacturing and imports sectors, with complaints that industries are unable to find their dollar needs. The government has said that it will procure $4 billion in additional funding before the end of the year from the World Bank and from the sale of land to Egyptians living abroad. This figure is expected to increase by another $1 billion to $2 billion, according to a note by Pharos Holding, the Cairo-based investment bank, due to the impact of the crash on tourist arrivals. Procuring the additional sum will not be easy, Pharos reported, as the government has already put off the issuance of a second tranche of its Eurobond programme due to the surge in global bond yields in anticipation of a US Federal Reserve rate hike. Yields on high-risk emerging-market debt, including that of Egypt, will likely surge, adding to the woes of heavily indebted emerging markets. According to Pharos, Egypt has a limited ability to absorb balance of payments shocks. This, it said, “could trigger disproportionate impacts and reactions by policy-makers, such as further restrictions on current and capital account flows, a steep depreciation accompanied by an aggressive interest rate defence, and price controls.” Lower hard-currency income will mean more pressure on the pound, with greater potential for quick depreciation. Only a couple of weeks ago, the Central Bank allowed the pound to officially slide to LE8.03 against the dollar. On the black market, the rate is LE8.50. The new CBE governor, due to take the helm later this month, is expected to relax the bank's grip on the pound, allowing it to slide further. The pound has lost 11 per cent of its value since January 2015. All this will significantly impact inflation, as traders and consumers expect another major devaluation, Pharos said. Monetary policy is also likely to change with the new CBE governor. Already the National Bank of Egypt and Banque Misr, the two largest state banks, have launched three-year savings certificates for Egyptian pounds with an interest rate of 12.5 per cent, two per cent higher than prevailing rates. “A change in the monetary policy of this magnitude — whereby domestic rates are significantly increased to support the local currency — is usually a prelude to short-term currency devaluation,” said Mohamed Metwalli, deputy CEO of HC Securities & Investment. “The Central Bank will have to hike rates at its next meeting, otherwise these banks will be under pressure, with very low margins,” one banker told Reuters. The next CBE monetary policy committee meeting will be held on 17 December. Such pressures might also force the government to implement reforms that it has been putting off, such as lifting subsidies on fuel. The government implemented a first phase of subsidy cuts on fuel in the summer of 2014 but has since delayed implementation of further phases. One observer, who preferred to remain anonymous, was sceptical about the prospects of Egypt receiving a World Bank loan, saying that such a loan will not be easily procured unless serious reform steps are taken. If Egypt signs a loan agreement with the International Monetary Fund (IMF), that could facilitate the World Bank loan, he said. Over the past five years, Egypt has had the possibility to borrow from the IMF but has been reluctant to do so. Whether this will now be seen as a solution remains unclear. Prior to the plane crash, both the government and the IMF had said that no negotiations on a loan programme were underway. The IMF loan is just one option, Metwalli pointed out. Other options available to the government, he said, would be the strategic sale of some state-owned assets. Metwalli said that Telecom Egypt's stake in Vodafone Misr, which is believed to be worth a few billion dollars, could be sold. As well, the government could auction a banking licence, sell state-owned land or global depositary receipts of some of the stakes it owns in companies. Even the Gulf economies which have generously supported Egypt over the past couple of years, with more than $20 billion, now have problems of their own as a result of falling oil prices. Chairman of the Arab Fund for Social and Economic Development Abdel-Latif Al-Hamad recently told journalists, “It is natural that when revenues drop, assistance drops as well.” Hard currency from other sources includes foreign direct investments, remittances and the Suez Canal. The latter's revenues have averaged $5 billion for the past four years, but this year, even with the New Suez Canal, they are not expected to be much higher, given the slowdown in global trade. Remittances are quite sizeable, at $19 billion in fiscal year 2014-2015, up from $12 billion in 2010-2011. “Repatriation of funds from more than eight million Egyptian expatriates is the main source of foreign currency and is reasonably reliable,” said Metwalli. However, some experts fear that even remittances may be affected by the impact of the low oil prices on the Gulf economies. As for investment, this came in at around $6 billion in 2014-2015. Any drop in Egypt's foreign currency will not only affect its ability to import its basic needs but could have repercussions on its credit rating. “If the net foreign currency reserve position continues to decline, it will curtail the ability of the government to pay off its foreign currency debt and, consequently, negatively impact its credit ratings,” said Metwalli. Before the plane crash, people involved with the tourism sector had been hoping that it would pick up. The Ministry of Tourism prepared a multi-million dollar tourism campaign to launch at the World Travel Market in London, beginning in the first week of November, only days after the crash. According to Al-Zayat, while the campaign itself may be temporarily put on hold, public-relations efforts targeting Egypt lovers and tourism communities will continue. He said that Egypt has received blows before and overcome them. Al-Zayat recalled that three months after the 1997 terrorism attack on tourists in Luxor, reservations were already returning. At that time, Egypt changed its tourism marketing campaign to sell specific destinations rather than marketing the country as a whole, he said. While Sharm El-Sheikh was one of the destinations being marketed as a brand destination, this time around, Amr Fawzi, treasurer of the Chamber of Tourism Agencies in Upper Egypt, hopes Aswan could be one of the brands. According to Fawzi, the Upper Egypt destination has seen almost zero occupancy over the past five years. But in the past week it has seen a 10 per cent increase in occupancy rates. The Ministry of Tourism has also said it will dedicate 25 per cent of the Tourism Promotion Authority's budget towards increasing the attractiveness of the area. “Aswan is an area that has many attributes that could make it a prime tourism destination. It just needs to be put on the radar of policy-makers,” he said. Prices also do not come any cheaper than Egypt, whether in Upper Egypt or Sharm El-Sheikh. Russians, in particular, have been offered very competitive prices in Sharm El-Sheikh, in part because they come in such large numbers. Russian groups could pay as little as $60 per person per night. That being the case, cutting prices any further is not on the table, Al-Zayat said. Waiting things out may be the only option. Mohamed Metwally of HC is optimistic. “We expect that this negative impact will be temporary and will be reversed in the medium term,” he said. Al-Zayat concurs. “Today, we are in the media. Tomorrow, it will be something else.”
