Early indications show that Egypt's reinvigorated economy may help cushion any negative repercussions of this week's bombings In recent years, tourism has advanced in its position as one of Egypt's top hard currency earners. Two years ago, tourism trailed Suez Canal revenues as Egypt's second largest source of revenue, bringing in roughly four billion dollars annually. Today however, it is Egypt's greatest source of income, generating $6.6 billion just last year. Moreover, Egypt hopes to increase tourism by 50 per cent to 12 million visitors a year by 2015. With so much at stake, observers are keeping their fingers crossed that the repercussions of this week's bombings will not be devastating to the economy. So far, their prayers seem to be working. Egyptian stock market reactions this week were better than expected. Though share values decreased slightly on Sunday, the first trading day after Saturday's bombings, the market showed surprising resilience on Monday. Sunday witnessed a brief selling frenzy throughout the morning leading to a 4.7 decline, the largest intraday fall since 10 April. However, by mid-session the market went on a rebound to recover some of its losses. The benchmark CASE 30 Index was down three per cent at closing to 4813.99, the biggest decline since 19 May. Yet on Monday, transactions witnessed a surprising recovery in which the CASE 30 surged by 0.33 per cent as investors began to shrug off their concerns that the recent attacks could have a long-term effect on tourism. Egyptian shares traded in European markets as GDRs were even less affected. The average decline in their value was even less than the three per cent seen in the local market. Moreover, Egyptian Euro bonds did not witness any change during Monday's transactions. "Investors realise that this is the reality of our times, especially after the London bombings" said one HC trader, "... it is happening everywhere, and they are coming to terms with that." However, the listed companies related to tourism were delivered a heavy blow with Orascom Hotels and Development, the largest builder of hotels and leisure facilities in the Middle East, losing 13 per cent on Sunday only to lose another 3.8 per cent on Monday to end at LE32.1. A statement from the Ministry of Investment pointed out that both Sunday and Monday saw active foreign transactions with foreign buying orders mounting to LE 200 million compared to LE 107.2 million of selling orders. In general, foreign transactions accounted for 28.6 per cent of overall market turnover on Sunday and Monday. Adel El-Ezaby, deputy chairman of the investors' general division at the Federation of Chambers of Commerce, attributed investors' mild reaction to the fact that bombings such as these are taking place worldwide. He said that should these bombings have any effect, it will be short-lived. El-Ezaby noted that in spite of the 11 September attacks, the US still received $270 billion in investments over the last four years. He pointed out that any drop in the stock market would be met with investors eager to buy shares at lower prices. Following previous attacks, the Egyptian stock market has rebounded within weeks. On the first day of trading after the 8 October Taba attacks, Egypt's benchmark CASE 30 stock index fell 3.8 per cent. Yet according to Bloomberg, between then and the end of the year, the index jumped 24 per cent to 2,567.98 points . The market dropped again after the 7 April blast in Cairo, with the CASE 30 declining 3.4 per cent to 3,934.78 on 10 April. A month later it was up 14 per cent and by 21 July it was up 26 per cent. "I think returns in the Egyptian stock market compensate, to a certain degree, the political risk of such events. This kind of risk is factored into the returns. I am concerned that there will be less appetite for foreigners to invest in the Egyptian market for the coming month," said Nashwa Saleh, head of research at HC Securities & Investment. Omnia Helmy, principal economist with the Egyptian Centre for Economic Studies, is more optimistic. She does not believe such incidents will affect investments. "Investors look at the business environment as a whole and the fundamentals of the economy, and Egyptian fundamentals have been good." As a report by Standard Chartered Bank shows, "Egypt is in the middle of an economic upswing thanks to a reinvigorated government reform program, high oil prices and strong world growth. Tax cuts and rising business confidence has led to domestic demand growing strongly for the first time in a decade." But what observers fear most is a possible drop in hard currency revenues which could bounce back on the economy. HC's Saleh has estimated that in a worst case scenario, this week's bombings may cause a drop of 20 per cent in tourism revenue for fiscal year 2005/ 06. Tourism currently accounts for about seven per cent of GDP. "I expect the attacks will knock off about two percentage points of what tourism contributes to GDP in 2006" said Saleh. A similar scenario occurred in 1997 following the Luxor massacre in which gunmen killed 58 tourists. It is estimated that after the Luxor attack, Egyptian tourism fell by over 20 per cent. Consequently, the Egyptian economy continued to suffer for years as a result of the incident, particularly since it was augmented by the Asian financial crisis. The Luxor incident is often cited as one of the reasons for the hard currency crunch which eventually lead to the devaluation and later the floatation of the pound in January 2003. The Standard Chartered Bank report illustrates that following the Luxor attacks, tourist arrivals dropped by seven per cent and it took two years of stability before numbers recovered to their 1996 level. In the wake of 9/11, tourist numbers dropped by 16 per cent after already being depressed by the outbreak of the Palestinian Intifada in 2000. Only in the last two years has the tourism industry begun to show strong signs of recovery. Numbers rose by 16 per cent in 2003 and by 34 per cent in 2004, the latter case representing an increase of two million visitors -- the largest ever annual increase. So far, the currency exchange market has not witnessed any drastic fluctuations in the value of the pound against foreign currencies. As of Monday morning, the pound/dollar rate stood at about LE5.7. Helmy added that other hard currency earners are doing well, such as oil and natural gas, and may compensate for any temporary drop in tourism revenues. Nonetheless, Helmy pointed out that this incident highlights the fact that Egypt needs to reduce its dependence on tourism for revenue and employment. "Tourism is vulnerable to external shocks," Helmy explained. She noted that there are already efforts to upgrade and modernise the manufacturing sector to boost exports and that "these efforts could bear fruit in the short term." Beside the need to diversify sources of foreign currency, the incident has underlined the importance of insurance. Currently, most hotels and other tourist establishments sign a regular insurance contract which normally does not include coverage for sabotage or terrorist-related damages. In the event of an attack, damages are not covered and insurance companies are not obligated to cover losses. "It is very important for any establishment to be insured up to its correct value. Unfortunately, most businesses, including hotels, do not seek proper insurance of their establishments. Proper insurance would definitely cost more money and they are reluctant to use it," commented Mohamed Mahran, director of Claims Department at AIG Egypt Insurance Company who added that the destroyed hotel in the latest terrorist incident could have handled its losses with greater ease and resumed activity faster if it had proper insurance. "The time has come to eliminate the lack of insurance awareness even among businessmen. Ready-made insurance policies may not answer the needs of some strategic industries such as tourism. But tailored policies may provide a solution." Reported by Economy Page staff
