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Violence threatens foreign investment and trade

CAIRO: As the Israeli strikes on Lebanon decimate nearly half a billion dollars worth of infrastructure and the Tel Aviv stock market plummets, the Egyptian economy and foreign direct investment in particular may be vulnerable to the regional instability. Egypt wants to attract $5 billion in foreign direct investment this year, excluding that of the …


CAIRO: As the Israeli strikes on Lebanon decimate nearly half a billion dollars worth of infrastructure and the Tel Aviv stock market plummets, the Egyptian economy and foreign direct investment in particular may be vulnerable to the regional instability.

Egypt wants to attract $5 billion in foreign direct investment this year, excluding that of the third mobile operator. I don t think this is achievable anymore, says Abel-Fattah El-Gibali, an economist at Al-Ahram Center for Political and Strategic Studies.

El-Gibali expects foreign investors to shy away from Egypt due to general concerns for the region rather than specific concerns about Egypt. People are afraid and foreigners don t necessarily follow the details, says El-Gibali.

Investor anxiety has already manifested itself in the stock market. The CASE-30 index, which tracks the two 30 stocks on the exchange, fell by an average of 4 percent per day for three days, before recovering slightly on Monday.

Trade is also likely to be adversely affected, although dealings between Israel and Egypt covered under the peace treaty and the Qualified Industrial Zones (QIZ) protocol are not expected to change.

The peace treaty requires Egypt to treat Israel on par with other international bidders for any Egyptian oil that isn t needed for domestic use. El-Gibali therefore believes that oil exports to Israel will continue unperturbed.

Egypt also imports various products from Israel under the QIZ protocol, which allows Egyptian goods manufactured in certain pre-approved zones duty-free access to the American market provided they contain a minimum Israeli input of 11.7 percent.

I don t think QIZ will be affected, because those participating in QIZ have already accepted the principle of dealing with Israel, says El-Gibali. There s even talk about decreasing the proportion of Israeli input from 11.7 percent to 8 percent … because Israeli production is not sufficient to meet the demand in textiles, spinning and weaving.

But bilateral, non-oil trade with Israel outside of QIZ and Egypt s trade with other countries may deteriorate, as a recent incident in the Mediterranean Sea indicates.

An Egyptian civilian ship en route to Syria was caught in the crossfire between Hezbollah and Israel on Sunday. The ship was hit near the Lebanese coast when Israeli ships enforcing a naval siege of Lebanon exchanged fire with Hezbollah.

We had 8,000 tons of cement on the ship, says Ahmed El-Sawi, administrative manager at Sinai White Cement Company. The company has suspended its shipments to Syria for an indefinite period.

Sinai White Cement owns a factory in North Sinai with a capacity of 1,200 tons per day and annual sales of nearly LE 237 million.

In addition to Syria, the factory exports to Palestine, North Africa and Europe. The shipments to Palestine have been stopped since the closure [of the border with Gaza], says El-Sawi.

The outlook for the tourism sector is mixed. Lebanon generates $1.4 billion from tourism and many of its visitors are from other Arab countries; these may chose to vacation in Egypt instead.

But the influx of Arab tourists will probably be offset by the reluctance of European visitors to visit the region. European travelers may decline due to safety concerns and because [travel] insurance for the region may become more expensive, says El-Gibali.

On the whole, the Egyptian economy is likely to be adversely affected by the continuing conflict.

The escalating violence may disrupt trade, as Sunday s events off the Lebanese coast demonstrate, while the decline in share prices reflects the market s concern and investors abroad are prone to even greater trepidation. It is therefore doubtful that the government will achieve its foreign investment target.

And while oil and gas receipts will grow as oil prices increase, domestic industries that rely on other petroleum products from the Gulf will see their margins narrow.

Topics: FJP

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