Chaos deters tourists, investors, adding to Egypt’s woes

Economy suffers as officials probe Mubarak-era deals, fail to contain unrest; inflation accelerates, energy imported food prices rise.

By DAVID ROSENBERG / THE MEDIA LINE
Protesters in Tahrir Square Egypt Cairo 311 (R) (photo credit: Reuters)
Protesters in Tahrir Square Egypt Cairo 311 (R)
(photo credit: Reuters)
Nearly 10 weeks after Hosni Mubarak was pushed out of power, the Egyptian revolution is deterring two kinds of people it needs to help restart an economy ravaged by strikes and political uncertainty.
Tourists, whose spending on hotels, restaurants and museum tickets accounts for a fifth of the economy, have yet to return, put off by concerns about crime and violence. Investors, who the economy needs to help create jobs and revive growth, are worried about a crackdown on Mubarak-era deals, arrests of leading business people and demands by the government to renegotiate contracts.
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“This period of uncertainty has created a cloud for investors – they are reluctant to take the risks,” Marwan Barakat, chief economist at Lebanon’s Bank Audi, told The Media Line.
Egypt’s economic woes add to the headaches of its new rulers, who are under pressure to contain inflation and create jobs while at the same time leading a delicate transition to democracy. Egyptians have used their new-found freedom to demand crony capitalists of the Mubarak era be investigated, to stage strikes and demand higher wages, and pressure the government for more subsidies, undermining efforts to steady the economy.
Last week, the International Monetary Fund cut its forecast for economic growth in the country to 1%, which is negative in per capita terms, from a previous forecast made last October of 5.5% in 2011. Egypt's finance minister, Samir Radwan, has sharply revised downward earlier estimates of the country's economic growth rate – to a more optimistic 2.5% to 3%, but low enough that he proposed Egypt seek as much as $10 billion assistance from abroad.
Meanwhile, inflation accelerated in the year to March to 11.5%, its highest level since April 2010, in the face of higher prices for energy and imported food, and supplies disrupted by unrest. Analysts have warned that increased government spending will fuel more inflation ahead, pressuring consumers battered by low incomes and unemployment.
Some parts of Egypt’s economy continue to function, in particular the Suez Canal, whose income from tolls was up more than 12% in the first two months of the year, and money sent home from Egyptians working abroad, which amounts to about $8 billion annually. But tourism and investment are stumbling.
In the first week of mass protests, at least one million tourists cut short their visits or cancelled reservations, Tourism Minster Mounir Fakry Abdel Noor, told The Washington Post in an interview April 16. In February, tourist arrivals were down 80% from the same time last year and in March they were down 60%, he said.
Hotel occupancy rates, which dropped to as low as 5% in February, have gradually risen to 25% to 30% in March, but that is less than half the rate they should be at this time of the year, Barclays Capital noted in a report this month.
The continued turmoil, meanwhile, has caused investors to pull some $8.5 billion out of the country in the two months before the local stock market re-opened for business March 23, opening up an additional conduit for capital outflow. A crackdown on Mubarak-era investors and dealmakers will give pause to those considering returning, economist said.
Egypt's public prosecutors' office said April10 it had frozen land in southern Egypt controlled by Saudi billionaire Prince Alwaleed bin Talal because the original sale of the land was illegal. Owned by Alwaleed's Kingdom Agricultural Development, the land was to be farmed with water pumped from the Aswan reservoir. Kingdom says it hasn’t given up on its claims.
The public prosecutor has also set its sights on Citadel Capital, an Egyptian private equity company alleged to have bought Helwan Portland Cement from the government at an under-valued price during the Mubarak years. Citadel says it bought Helwan from private owners, not the government, but the government in the meantime has banned Ahmed Heikal, its chairman, from travelling outside Egypt pending an investigation.
Egyptian officials have talked about renegotiating long-term contracts to supply Israel and Jordan with natural gas, asserting that the contracted price is too low and unfair.
Barclays warned that steps like these are “sending the wrong signal about the direction the overall business environment in Egypt is taking, despite recent declarations by Egyptian officials confirming their commitment to a free market economy.”
Not all investors are bearish are Egypt. Mark Mobius, whose Templeton Asset Management holds about $34 billion in capital, told reporters in Dubai on Sunday that Egyptian stocks and the economy and equity market will recover within a year.  A day earlier, the Kuwait Investment Authority (KIA), the Gulf state's sovereign wealth fund, announced it was launching a company with 1 billion Egyptian pounds ($167.8 million) capital to invest in Egypt.
Barakat of Bank Audi said that if the government can make the transition to freer, more democratic and more transparent rule, Egypt’s diverse economy and its big population present “important” opportunities for investors. “This cloud may have a silver lining,” he said.
 “Almost all sectors of the economy have been operating much below their potential output, even before recent developments.” he told The Media Line. “A successful transition will create an opportunity to address this output gap.”