LONDON: If recent history is anything to go by, then this week s bombings in Egypt will not deter investors who stuck with its resurgent economy after even bloodier attacks on the Sharm El-Sheikh resort in July 2005. An economic reform program launched by the government in 2004 has been applauded by analysts for bringing in foreign direct investment (FDI) and improving the government s fiscal position. The 2005 bombings did not deter FDI from rising to $3.9 billion (LE 2.2 billion) in that year, or 4.2 percent of gross domestic product, of which a third was in non-energy projects. Prior to this week s bombs the government expected FDI to rise by 15-20 percent in 2006. Three bombs killed at least 24 people and injured scores more on Monday in the east Sinai resort of Dahab, while two suicide bombers on Wednesday blew themselves up in north Sinai. The attacks will likely have only a limited impact on tourism, the largest private sector employer, and the economy overall, analysts said. There is no question this is a negative at the margin, but because fundamentals have improved so much investors seem fairly shock resistant, said Mehmet Simsek, emerging markets strategist at Merrill Lynch in London. Since the 2005 bombing at Sharm El-Sheikh, Cairo s benchmark Hermes stock index is up 28.8 percent, and that is after the sharp sell-off of Middle-East stock markets that began in February as a speculative bubble was pricked. The Hermes closed at its low of the day on Wednesday, 55,906.33, a loss of 1.80 percent. It had reached an all-time high of 68,994.73 on February 1, 2006. Simsek said the impact on the bond and currency markets should be fairly limited, while the equity market should be more vulnerable because of valuations. The key point to highlight is that underlying fundamentals are good, there are strong external balances and reserves are high. There is political stability and the country is not suddenly going to go into a state of civil war, Simsek said. However, last week the International Monetary Fund and Cairo agreed the government must cut spending and reduce public debt levels. Analysts estimate the net government debt-to-GDP ratio could rise above last year s 77 percent. Standard & Poor s said on Tuesday that the Dahab bombings are not affecting Egypt s credit rating of BB+ with a stable outlook but said that while the response to Sharm El-Sheikh bombs proves Egypt s resiliency, there are concerns. If a second set of bombings in an Egyptian tourist resort only nine months later leads to a crystallization of perceptions that Egypt s popular Sinai peninsula is an unsafe travel destination, this could lead to a more significant decline in visitor numbers, S&P said in a statement. Tourism provides the second largest source of foreign currency revenue after exports for Egypt. The sector showed its resiliency following the July bombings with revenue growth of 10 percent year-on-year in the third quarter of calendar year 2005, compared with 11.2 percent in the previous quarter. Egypt has also benefited from higher oil and gas revenues, which have boosted its foreign exchange reserves, now roughly $22.5 billion, or some 25 percent of gross domestic product. These reserves provide a sizeable cushion to any shocks to the system. Another sign of foreigner investor interest in Egypt is the growth in demand for local currency government debt. Foreign investor holdings in Egypt s T-bill market was zero at the end of June 2004 and as of Jan. 31, 2006 it stands at LE 12 billion. I think it is a remarkable increase, said Berna Bayazitoglu, emerging markets economist at Credit Suisse in London. The tightly controlled currency market has kept the Egyptian pound stable around 5.745 to the U.S. dollar, slightly stronger than before the Sharm El-Sheikh attack. Infrequently-traded Egyptian sovereign bonds denominated in U.S. dollars barely traded on Wednesday as they are primarily held in long-term accounts, mostly by local investors. At this stage I don t think there is any reason to see a distinct shift in investor sentiment in Egypt, Bayazitoglu said. Reuters
