Egypt’s ceasefire gains

Niveen Wahish and Sherine Abdel-Razek, Thursday 23 Jan 2025

Experts are hoping the ceasefire in Gaza will bring relief to the Egyptian economy

Egypt’s Ceasefire gains

 

On the back of Wednesday’s news about the Gaza ceasefire, the stock market reversed its five-day losing streak and began an upward trend that continued for the next three trading sessions. Egypt’s internationally traded government bonds were on the rise in the days leading to the agreement amid expectations that the end of the war would improve investor perceptions of Egypt’s geopolitical risk. 

Over the past 15 months the Egyptian economy has suffered from the fallout from the war in Gaza. Suez Canal revenues were hardest hit as attacks by Houthis in Yemen on ships in the Red Sea caused shipping companies to divert vessels. In the first quarter of 2024-25, Suez Canal transit receipts plummeted by 61.2 per cent to around $931 million compared to $2.4 billion for the same period a year before. According to a Central Bank of Egypt balance of payments press release, the fall was due to a drop of 68 per cent in net tonnage, and 51 per cent in the number of vessels transiting.

As of mid-September 2024, the volume of container shipping through the Suez Canal was more than 70 per cent below pre-conflict levels, according to the International Monetary Fund’s (IMF) Regional Economic Outlook for October 2024.

While the drop in Suez Canal revenues may have been the most pronounced, it was not the only consequence of the war. Overall economic performance has been disrupted, prompting President Abdel-Fattah Al-Sisi to call on the IMF and international financial institutions to be less demanding of Egypt as it implements its reform programme.

The ceasefire in Gaza is set to positively impact Egypt’s economy, particularly when it comes to hard currency inflows from the Suez Canal and tourism sectors, Ali Metwally, economic advisor at IBIS Consultancy, told Al-Ahram Weekly. He remains cautious, however, about Red Sea trade route: “While the ceasefire may gradually restore confidence among shipping companies, the recovery of Suez Canal revenues to pre-conflict levels is expected to be a gradual process in fiscal year 2025-26, contingent upon sustained regional stability and demonstrable security improvements.”

Sara Saada, senior economist at CI Capital, expects that 2025 will see 50 per cent of lost Canal revenues restored, with complete restoration by 2026, though there is some potential this will happen at a faster rate.

Metwally points out that while the tourism sector has shown resilience throughout the conflict in Gaza, it has the potential to do better with a ceasefire.

Despite geopolitical risks, Egypt recorded 7.1 million tourist arrivals in the first half of 2024, with projected growth of six per cent over 2024-25, said Metwally. While this marks a slowdown from the 26.9 per cent growth in 2023, the sector’s contribution to foreign currency inflows remains robust, supported by strategic marketing and the diversification of source markets.

As for foreign direct investments (FDIs), Metwally expects the ceasefire to alleviate some geopolitical concerns, reducing risk perceptions and improving investor sentiment, though the extent of any positive impact will depend on the government’s commitment to implementing economic reforms, improving transparency and ensuring a level playing field for private enterprises given that structural issues like bureaucracy and the dominance of state-linked actors continue to constitute barriers.

He noted that there has been some volatility in FDIs, with $11 billion of inflows in 2022 followed by $9.8 billion in 2023 (a 13 per cent decline) and over $45 billion in 2024, largely thanks to the Ras Al-Hekma deal.

“Prolonged geopolitical tensions have also weighed on the attractiveness of state assets, deterring investors from committing to substantial purchases,” said Metwally. He believes the ceasefire may render these assets more attractive to investors by reducing geopolitical risks, and by extension risk premiums, though he adds that any real improvement in valuations and successful transactions will depend on the government’s ability to address structural issues such as financial transparency and bureaucratic obstacles.

The ceasefire agreement’s third phase prioritises rebuilding Gaza, with local construction and building material sectors expected to be big contributors to the wide-scale reconstruction efforts.  According to statements by officials, Egypt is preparing to host a Gaza reconstruction conference attended by international donors.

Reconstruction, noted Saada, could represent an uptick for Egypt’s construction sector.

According to Waleed Gamal Eddin, board member of the Construction Materials Export Council, in earlier Gaza reconstruction deals Egypt was involved in limited developmental infrastructure projects but this time “the scale of projects that the Strip needs are huge and will cost anywhere between $40 and $80 billion”. 

Fifteen months of Israeli bombardment has destroyed 72-80 per cent of the Strip’s power and water stations, homes, schools, and hospitals.

“How much of the work is assigned to Egyptian construction companies depends on the donors’ decisions and on political considerations,” said Gamal Eddin.

He stressed that from an economic feasibility point of view, Egyptian companies will often be the best option.

“Egypt’s proximity to Gaza will make it easier and less costly to transfer workers and equipment through the Rafah Crossing. There are plenty of local construction companies with excellent track records. Egyptian labour is relatively cheap and there is a large supply of high-quality construction materials, especially cement, steel and ceramics. The building materials sector in Egypt has plenty of unused capacity that can be directed to the enclave.”

“We have unused capacity of 30 per cent in steel factories, 43 per cent in cement, and 50 per cent in ceramics.”

Despite the fact exports of building materials reached an all-time high of $10.6 billion in 2024, the slowdown in the execution of state projects has resulted in the sector working below capacity, explained Gamal Eddin.

Reconstruction efforts in Gaza will take time, however, as huge amounts of debris must first be cleared. The UN estimates that the war has left 50 million tons of rubble which it would take 100 trucks working full time 15 years to clear.

Metwally expects the impacts on Egypt’s economy of the ceasefire to materialise over the medium to long term.

“While immediate improvements in investor sentiment and tourism may occur, substantial economic benefits, including increased FDIs and successful privatisation of SOEs, will likely take several months to a few years, contingent on sustained peace and consistent policy reforms.”


* A version of this article appears in print in the 23 January, 2025 edition of Al-Ahram Weekly

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