Where it hurts
The war in Iraq is hitting Egypt right in the pocket. Al-Ahram Weekly surveys the fallout
The first week of the US attack on Iraq has brought swift and far-reaching consequences for the Egyptian economy, which has yet to recover from the effects of a two-month-old devaluation of the pound. While the strike has dealt a blow to Egypt's main foreign currency earners -- tourism, the Suez Canal, expatriate remittances, exports and, to a lesser degree, oil -- a depreciated pound and increased freight costs have led to a higher import bill.
And there is no relief in sight. One week before the war started, Egypt sent a high- level economic delegation -- headed by Minister of State for Foreign Affairs and International Cooperation Fayza Abul- Naga, and including Minister of Finance Medhat Hassanein and National Democratic Party Economic Committee Chairman Mahmoud Mohieddin -- to negotiate with the US administration for a $4.4 billion aid package to help Egypt offset the negative impacts of the US attack on Iraq. The Egyptian government has estimated losses of $8 billion in income due to the war.
However, Foreign Minister Ahmed Maher last week refused to comment on reports that Egypt has received $2.5 million in additional US assistance to alleviate some of the economic setbacks expected due to the war in Iraq. "The issue of the countries that will suffer from a war in Iraq and how the world will deal with the alleviation of [this] suffering is [being] proposed," Maher said on Saturday. "But I do not want to touch upon it now. There are priorities, and the number one priority right now is to look towards the Iraqi people and hope we can spare them any suffering."
TOURISM IN THE RED: The Egyptian tourism sector has been one of the war's first casualties. As the war on Iraq escalates, the number of tourists to Egypt is dropping drastically. Last week, hotels witnessed a 50 per cent drop in their occupancy rates despite a reduction in room rates. The industry is bracing for a further decline as the war goes on.
Additionally, travel agents have reported massive cancellations of trips to all Egyptian tourist destinations in the last few days.
Tourism industry officials expect the number of visitors to Egypt to decline to between three and 3.4 million this year, down from five million in 2002. They also predict that the Egyptian economy will lose $2 billion in 2003 owing to a decline in tourism.
For this reason, Minister of Tourism Mamdouh El-Beltagui has formed a central operation chamber to follow up on tourist movements. A number of committees in the hotel and travel agency sectors will provide this chamber with up-to-date reports on tourist activity. In the early days of the war the chamber monitored several cancellations as well as a drop in the movement of charter flights to Egypt's tourist destinations. The chamber will also be in direct contact with Egypt's tourist offices abroad as well as tour operators in Europe to discuss the situation with them and to ensure Egypt's safety and stability.
According to El-Beltagui, the amount being dedicated to handling this tourist crisis will be in the neighbourhood of LE3 billion. "LE1.15 billion will be given as compensation to workers [who will be laid off] as a result of the crisis. LE120 million will be dedicated to the incentive programme for charter flights [whereby the Egyptian government pays 30 per cent of the cost of charter seats when at least 50 per cent of seats on a plane are booked] and LE1.75 billion will be spent on financial and tax facilities for investors," El-Beltagui said.
Meanwhile, the Ministry of Tourism intensified its promotional efforts abroad, assuring travellers that Egypt is safe and stable, is geographically far from areas of tension and has safe skies. The campaign is directed at the foreign media, tour operators and major foreign travel agencies.
There are also plans to advertise and market Egyptian products abroad.
However, the present crisis is not the first faced by Egypt's tourist sector. For more than a decade, the industry has been dealt consecutive blows, starting with the Kuwait war of 1991 and, more recently, the events of 11 September, the war in Afghanistan and the escalation of Israeli aggression against the Palestinians.
CANAL INCOME TO SUFFER: The Suez Canal Authority refused to comment on how traffic in the canal has been affected by the war. However, experts say that a war in the region is certain to affect traffic in a negative way, due to an increase in insurance premiums, particularly for ships heading south. Egypt's income from the Suez Canal during 2002 stood at $1.963 billion, compared to $1.909 billion in 2001, according to Suez Canal Authority figures.
NUWEIBA, ENCORE: In a repeat performance, reminiscent of the second Gulf War in 1990, hundreds of Egyptians fleeing Kuwait and, in lesser numbers, Iraq, arrived at Cairo Airport and the Red Sea Port of Nuweiba. A huge proportion of Egypt's foreign currency earnings from the remittances of Egyptian expatriates working in the Gulf are consequently at stake. According to the Central Bank of Egypt, these earnings reached some $2.85 billion in fiscal year (FY) 2001/2002, registering an eight per cent increase over the previous FY.
However, a spokeswoman for the Ministry of Manpower and Immigration said the ministry was not worried. She said the ministry was in constant communication with its offices in Iraq, Kuwait, Saudi Arabia and other Gulf states and that the returnees represent the families of workers who have returned for safety reasons, not the workers themselves.
Official figures put the number of Egyptians working in Iraq at 20,000. No official estimates of the number of returnees has been announced yet, but the government is preparing emergency measures to handle returnees, including tents, medical supplies and food.
BANKING ON STABILITY: Although markets have been depressed, businesses are running relatively normally. While people have had time to take in the situation over the weekend, downtown businesses have had some logistical difficulties because of demonstrations in the downtown area. In fact, most banks downtown have a backup plan whereby employees not able to reach their headquarters can pursue their work from other branches in quieter parts of the city.
Asked whether their operation will be affected in any way by events, a source at Citibank Egypt, part of the US-based global financial group, said that their operations have not and will not be affected. "We have been in the Middle East for 50 years and are fully committed to the region," the source said. "We have no intention of scaling back our operations." The source also said that they consider themselves a global institution that functions as a local player in every market.
POUND HOLDS UP: In contrast to expectations prior to the war, or at least in the immediate term, the pound has not fallen against the dollar. Its value ranged from between LE5.7 and LE5.75. Shahinaz Foda, general manager of the treasury department at the Egyptian-American Bank (EAB), said the pound has not been affected at all, mainly because it was already undervalued. She also said that the pound has been able to sustain itself due to an increase in the supply of dollars in banks, mainly because foreign currency earners, such as exporters and tourism agencies, have channeled their dollars through official channels.
However, how long this can be sustained remains to be seen, particularly as the war has dealt a severe blow to the revenue of tourist companies, who are obliged to deliver 75 per cent of their hard currency earnings to banks.
The Kuwaiti dinar, however, has been affected. According to a source in one downtown foreign exchange bureau, individuals returning from Kuwait have been exchanging Kuwaiti currency to pounds in order to cover expenses. The Kuwaiti dinar has fallen in value from LE18.8 per dinar to LE17.8.
TRADE TAKES A BEATING: Egyptian trade volumes, including exports and imports, are expected to be negatively affected by the US-led war on Iraq. First to be affected will be trade to and from Iraq and Gulf markets. Moreover, importers and exporters will find difficulties in delivering or receiving goods that may result in reduced production.
Helal Sheta, chairman of the exporters division at the Federation of Egyptian Chambers of Commerce, said that Egyptian exports to Iraq have come to a complete stop over the past three months. Egyptian exporters stand to lose some $1 billion in exports to Iraq, of which $250 million are locally manufactured products, with the rest being imported.
Exporters said that they have lost the Iraqi markets, which were opened during the last few years of the UN "Oil for Food" agreement and the bilateral Free Trade Area. The agreement exempted Egyptian exports from customs duties. Exporters expressed their fears that they may not be paid for their exports, which had already been shipped to Iraq before the war. "Nobody knows what will happen after the war but I think the UN will pay us our money," said one exporter, who preferred to remain anonymous. He said Egyptian exporters affected by the Gulf War of 1990-91 did not receive UN compensation until recently.
Experts fear that soaring insurance premiums, coupled with a higher cost for imported inputs, could raise the total cost of Egyptian exports to levels that would make them uncompetitive in international markets.
Since the beginning of the US attack on Iraq, the Middle East region has been defined as a war zone. Thus, shipping companies have raised their prices by 10 to 15 per cent.
Khaled Hamza, chairman of the imports and customs committee at the Egyptian Business Association (EBA) said that, because of the war and the floatation of the Egyptian pound, Egyptian imports are expected to drop from $14 billion in 2002 to $10 billion in 2003.
Hamza explained that since the floatation of the pound in January, banks have been minimising import letters of credit in an attempt to reduce demand for foreign currency.
The reduction of imports, of which 60 per cent are raw materials used in manufacturing, will have a negative impact on industry. Hamza said that if manufacturers do not have enough stocks of raw materials for the coming two or three months, some of them will have to reduce production and lay-off workers.
This week, President Mubarak held a ministerial meeting to discuss how Egypt should manage the economic impact of the US-led war against Iraq. Mubarak gave clear instructions that strict regulations should be applied to guarantee that foreign currency revenues from the Suez Canal, tourism, the oil sector and exports should flow directly to banks and not to parallel markets. Moreover, concerned ministers have been requested to follow up on foreign currency revenues in these sectors daily.
According to new regulations, exporters who refrain from relinquishing their foreign currency revenues to banks will be punished by having their export licenses cancelled. The Exporters Division at the Federation of Egyptian Chambers of Commerce held a meeting this week to discuss the problems facing exports.
MARKET TAKES ADVANTAGE: While, unexpectedly, the Egyptian capital markets reacted positively to news of war on the first days of the strike on the back of expectations that the war would be a short and fast one, the resistence of Iraqi forces reversed the market mood. The first days of the war witnessed a rebound in market transactions and indices from the previous weeks' slump. In so doing, the market followed an international trend, joining the rally of the British FTSE, American Dow Jones and a number of Asian indices.
Market experts attribute this to US assertions that the war will be short and investor belief that the world economy will revive thereafter.
"On the first days of the war, the coalition forces asserted that it will be short. This stirred hope among investors, who were led by economists' belief that a short, successful strike would bring down oil prices and stimulate economic recovery, leading to stock market rallies," explained Joseph Iskandar, an investment analyst at Prime Securities. He pointed out that, when the first attack took place, things did not get worse because, "in financial markets, waiting for war is riskier than war itself."
Share prices in local markets were already losing ground during the period that preceded the attack, according to Iskandar, and they were therefore at a very attractive level when the war started. "Investors, both institutional and individual, entered the market to snatch some of the most active stocks, such as Orascom Telecom and Pachin, at low prices," Iskandar said. However, shares that fared best in the days immeidately after the breakout of hostilities, took a downward turn as it became apparent that the war would not be over soon. The benchmark Hermes Index, which includes the market's most active 35 stocks, also declined.
The market was also relieved over figures released by the Central Agency for Public Mobilisation and Statistics (CAPMAS) about Egyptian export losses due to the termination of the UN "Oil for Food" Programme. CAPMAS has put the annual losses from exports at a mere $112 million, compared to the figure of $1 billion that had been announced earlier.
International transactions increased by 52 per cent through the week. "Foreigners now consider Egypt the most stable market in the region," said Iskandar. The market's positive sentiment was illustrated by a decline in bond transactions' share of the overall market. Investors usually invest more in fixed-yield bonds at times of uncertainty. Bond transactions did not exceed 15 per cent of the overall turnover last week, compared with up to 60 per cent in earlier weeks.
GOLD SOARS: Always a safe-haven for savings in times of war, gold has recently witnessed a sharp increase in prices. Sky- rocketing increases in gold prices during the past few months were the result of different factors. Internationally, the prolonged tense period that preceded the eruption of the war has created a strong tendency among the international business community to invest in gold as the safest saving tool in times of crises.
"Speculation on gold has lately been a thriving business in the international gold bourses," said Hassan Eleish, a gold trader. The ounce (31 grammes) of gold is now being sold for $370, compared to $270 last year, he said.
It was only natural that the local gold market is affected by the international increases in gold prices. While in 2002, one gramme of 21-carat gold was sold for LE45, the price jumped to LE64 a month before the war erupted. During the past few weeks, it has settled at LE58.
Eleish claims that, for the past few months, most gold traders and manufacturers have been working at less than 25 per cent of their capacity because of the lack in demand. "The fluctuation in gold prices has created a state of uncertainty among gold traders. Moreover, the latest increases in commodity prices have caused consumers to shy away from buying gold," he said.
A number of local developments coincided with the war news to make the gold market even more unpredictable. "The floatation of the Egyptian pound early this year, in addition to the recession the local market has lately been suffering from, have had their toll on the gold business in Egypt," he said.
OILING ITS WAY THROUGH: In the oil sector, where Egypt is both an importer and an exporter, the picture is less gloomy. Although experts say it is difficult to predict how oil prices will behave as the war lingers on, Minister of Petroleum Sameh Fahmy is not worried.
"Price increases in oil products are a mixed blessing for Egypt," he told Al- Ahram Weekly.
Because it is a supply and demand market, it is difficult to assume how expected increases in oil prices, in case the war drags on, will affect Egypt, the minister said. While Egypt imports one million tonnes of butagas and 500,000 tonnes of gas oil annually, which constitute four per cent of its local consumption, estimated at 44 million tonnes annually, it exports high octane gasoline and jet fuel.
Much to the astonishment of oil experts, who had expected oil prices to soar once the war begins, the ongoing war has, so far, had little impact on oil prices worldwide. However, oil prices did increase to $33 per barrel during the waiting period before the war. Later, oil prices dropped by $6 to register an average $26.4 per barrel at present.
The Organisation of the Petroleum Exporting Countries (OPEC) had earlier made a commitment to pump more oil to cover for whatever emergency demands during the crisis. Both Kuwait and Saudi Arabia are pumping their usual quotas.
"Coordination with concerned official bodies are ongoing at the highest level to ensure that the Egyptian market will not suffer from any shortage in these products," he said.
Fahmy said Egypt has strategic reserves of imported gas oil, fuel oil and kerosene. "These products are being imported from Algeria and Europe, which are far away from the war area," he said.
At present, the General Petroleum Authority is pursuing a strategy of keeping 12 per cent of the oil in refineries as a strategic reserve in case of emergency. Meanwhile, additional means of transportation are now being put to service to ensure a fair and smooth distribution of oil products along the country.
Reported by: Rehab Saad, Shereen Nasr, Sherine Abdel-Razek, Mona El- Fiqi, Niveen Wahish
Al-Ahram Weekly Online : 27 March - 2 April 2003 (Issue No. 631)
Located at: http://weekly.ahram.org.eg/2003/631/ec1.htm