Egypt: Recovery expected following Sinai bombings; No foreseeable change in current account Forecasts in FY05/06

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Despite the possible short-term negative implications of the recent Sinai bombings on tourist arrivals and current account flows, there is a strong argument for a milder-than-expected impact, according to EFG-Hermes. 

Data and anecdotal evidence suggests that the South Sinai resorts were witnessing a strong recovery in terms of tourist arrivals and occupancy rates during March and April 2006, following a slump caused by the Sharm El Sheikh attacks of July 2005. Tourist arrivals following those attacks remained stable on a year on year basis and stock market performance was particularly strong from mid 2005 until the region-wide correction in equity markets in mid February 2006.

“The impact of the terrorist attacks on tourist arrivals and the recovery period were the worst following the Luxor attacks in 1997. In the two incidents of Taba in October 2004 and Sharm El Sheikh in July 2005, both the impact and the recovery period shrank significantly in a sign of growing resilience,” said Hany Genena, Senior Economist at EFG-Hermes.

In terms of macroeconomic implications, EFG-Hermes predicts no change in current account forecasts for the fiscal year 2005/06.  In its latest update on Egypt, the firm estimated total tourist arrivals in FY05/06 at 8.4 million, down from 8.6 million in FY04/05. For the period between July 2005 and March 2006 (9M05/06), total tourist arrivals stood at 6,500 thousand, which is marginally higher than 6,491 thousand during 9M04/05.

“Accordingly, we feel comfortable not changing our FY05/06 forecasts until the magnitude of the recent Sinai events becomes clearer,” said Genena.  He added, “From a broader current account perspective, we believe 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. Despite the steady decline in crude oil production, the average spot price of Suez blend averaged USD56 per barrel in 2006YTD, up 20% from its average during 2005, and is likely to hover in this range throughout the rest of the year. Higher crude oil prices are also likely to spillover into higher Suez Canal revenues as it becomes more cost effective to cross the canal versus going around the Cape of Good Hope.”