Sitting lightly

The Dahab attacks are expected to bounce off the back of the Egyptian economy. Sherine Abdel-Razek and Niveen Wahish report

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The Egyptian economy has become increasingly resilient to shocks. In 1997 when terrorists attacked tourists in Luxor, the economy was to a large degree negatively affected. Tourism, a major source of revenue, did not start returning to former levels until two years later. The effect of the Luxor tragedy was reflected in the level of visitor arrivals to Egypt in 1998, which declined by 13.8 per cent compared to levels attained in 1997. It only picked up in 1999.

Fortunately, this has not been the case in the more recent incidents in Taba (October 2004) and Sharm El-Sheikh (July 2005). The brokerage firm EFG-Hermes said following those bombings that "both impact and recovery periods shrank significantly in a sign of growing resilience (of the economy). Dahab too, after last week's bombings, is expected to have a short-lived impact on tourist arrivals and current account flows."

This is already clear in the stock market's reaction which showed a resilient performance in the three trading days following the Dahab bombing. The CASE 30 index which traced the performance of the most heavily traded companies lost around 1.6 per cent of its value on Wednesday, the first trading day which followed the bombing. The mild retreat is compared to the 3.07 per cent and 3.81 per cent losses in the CASE on the first days of trading after the Sharm El-Sheikh and Taba bombings respectively. Foreigners, who are usually expected to be the first to pull out of a country in the event of political turmoil were, in fact, net buyers with LE 122.84 million worth of foreign transactions.

Things got even better on Thursday and Sunday as the market gained 0.83 and 0.72 per cent respectively.

HC Securities saw this immune performance as a solidification of investor confidence in a strongly developing economy which grew by 6.1 per cent in the second quarter of this year, up from 4.7 per cent in the comparable period last year. Another factor which helped support the economy according to HC is the dramatic decline in inflation, which went down from a shocking 17.8 per cent in the second quarter of 2004/ 2005 to the current 3.1 per cent.

Another aspect that is often affected by such events is the value of the pound against the dollar. This is because of the potential impact of such incidents on tourism revenues, the country's largest hard currency earner. The value of the pound has only slightly risen against the dollar to reach LE5.74 per dollar, losing only fractions of a piastre. However, Amr Bahaa, head of the Treasury and Money Markets Department at Piraeus Bank-Egypt does not believe this to be cause for concern, provided it is available in abundance. According to Bahaa "this is very much the case."

EFG-Hermes also believes that the recent surge in crude oil prices and the steady increase in natural gas exports will partially offset any short-term slump in tourism revenues. It also expected that higher crude oil prices will spill over into higher Suez Canal revenues as it becomes more cost effective to cross the Canal, as opposed to circumventing around the Cape of Good Hope.

Neither does EFG-Hermes see tourist arrivals dropping drastically. A flash note issued by the firm showed that despite forecasts, tourist arrivals in FY05/06 reached 8.4 million, down from 8.6 million in FY04/05. In the period between July 2005 and March 2006, tourist arrivals stood at 6.5 billion, slightly higher than the 6.49 billion of the same period in the previous year.

The flash note compared the effect of what happened in Egypt to the situation in Turkey which was the target of several terrorist attacks from early 2005 onwards. "Its main stock market index (National 100) appreciated by 55 per cent from January 2005 to March 2006, and its currency appreciated two per cent vis-à-vis the dollar over the same period."

In Bahaa's opinion, the government could ensure tourist flows to Egypt by encouraging foreigners to own homes in Sinai and other regions. "In that case it would be their home, and such an incident would not keep them away." Bahaa says that these homes would be available at cheaper prices than those at which they are currently offered. If foreigners are able to own an expensive home, it means they may own homes in other countries as well, with the result that there would be less of a "sense of loyalty to the place," said Bahaa.