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Egypt's cycle of violence threatens to destroy country's fragile economy

By John Defterios, CNN
August 20, 2013 -- Updated 1200 GMT (2000 HKT)
STORY HIGHLIGHTS
  • Egypt's cycle of violence is tearing the country apart and threatening its economy
  • The country's key drivers of growth, tourism and foreign investment, are under pressure
  • Tourists are leaving, aid is under question and foreign investment is dropping
  • The country cannot afford its economy to go into tailspin

Editor's note: CNN's John Defterios is CNN's Emerging Markets Editor and anchor of Global Exchange. Watch Sunday to Thursday 1900 UAE and follow him on Twitter.

Abu Dhabi (CNN) -- The vicious cycle of violence -- with more than 900 people killed in the span of a week -- is tearing the social fabric of Egypt and threatens to put the economy into a tailspin when it can least afford it.

Two core drivers of the region's most populous country, tourism and foreign investment, are under threat as violence spreads to the Sinai Peninsula.

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At least 25 Egyptian policemen were killed in an ambush close to the town of Raffah on the border of Gaza. This was the same location where 16 soldiers were killed a year ago, which led then President Mohamed Morsy to make a power grab over the military.

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The area is considered lawless, with a toxic mix of Bedouin tribes and a fresh flow of Islamic militants who have come in after conflicts in North Africa.

But the Sinai is a vast area, covering 60,000 square kilometers (23,000 square miles). The two attacks happened in the north, but worries have spread quickly to the Red Sea resorts in the south. A tourist was killed last week during violence in Hurghada, part of the south. Now, authorities recommend that tourists who remain there do not leave their resort compounds.

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A handful of European countries have put in place travel alerts and a similar number of the region's tour operators have advised clients to avoid the popular dive spot and its pristine beaches altogether.

The area is considered lawless, with a toxic mix of Bedouin tribes and a fresh flow of Islamic militants
John Defterios

The tourism sector is the number one export earner for Egypt, and made up 11% of GDP in 2012. One well-known hotel owner in Sharm el Sheikh, who spoke on background, said tourism receipts were down 25% at his resort in the first half as high end visitors avoided the Red Sea. Those who kept their plans intact are spending less, he said.

If tourism is the big foreign exchange earner, then foreign investment has been a pillar of long term job creation by leading multi-national brands.

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Some of them decided to suspend operations during the height of the chaos. This list includes vehicle makers General Motors, Toyota and Suzuki, German chemical giant BASF, Swedish household goods manufacturer Electrolux and the Dutch brewer Heineken.

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Three have decided to re-open -- GM, BASF and Electrolux -- but it is not clear if they can be fully operational in this climate of uncertainty.

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Foreign investment was flowing into Egypt during the height of economic reforms. According to the Ministry of Investment, the country raised $49.2 billion between 2005 to 2010. In the last two years, it garnered only 10% of that total. If existing investors in the country, with sizable commitments to plant and equipment are wobbly, others who had Egypt in their top list of destinations must be thinking twice.

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Egypt has its allies who don't want to see the so-called road-map veer off course. The interim government says it is committed to constitutional reform and elections by early 2014. Saudi Arabia's foreign minister Prince Saud Al Faisal has raised fears of a domino effect if the country is not stabilized, warning Europeans that things can get much worse if aid is cut off.

That is why the Saudi Prince came out to suggest that the Gulf States will be willing to fill any funding cut off by the European Union or the U.S.

Egypt's central bank said it had nearly $19 billion dollars on hand at the end of July, the highest total since November 2011. That sum sounds promising, but it is only a six month supply of capital. Turkey, for example, has foreign reserves of nearly $130 billion according to the country's central bank.

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