Egypt’s struggling economy faces new risks as the war in the neighbouring Gaza Strip threatens to disrupt tourism bookings and natural gas imports.

Oil-rich Gulf countries, which repeatedly propped up Egypt’s finances with deposits over the past decade, had recently shifted to seeking profitable investments instead. Now they may step up assistance once more, analysts and bankers say.

The Gaza war on the border with Egypt’s Sinai Peninsula comes after the impact of Russia’s invasion of Ukraine and the coronavirus pandemic exposed long-standing frailties in the Egyptian economy.

Egypt had relied heavily on inflows of short-term portfolio investment, tourism revenues and remittances to partially cover a chronic trade deficit, leaving it vulnerable to shocks.

“Foreign sentiment on Egypt is so weak, and now with this coming along it’s last thing that Egypt needed. A third crisis,” said Monica Malik, an economist with Abu-Dhabi-based ADCB.

After a borrowing binge quadrupled foreign debt, Egypt needs more than $28 billion to meet repayments in 2024 alone. A foreign currency shortage has led to a $5 billion backlog of imports stuck at ports, and problems for foreign companies repatriating dividends, bankers say.

Government payments for some wheat imports and to foreign oil and gas companies have been deferred.

A $3 billion IMF programme has gone off track over Egypt’s reluctance to float its currency and delays in state asset sales. All main three rating agencies have downgraded Egypt’s sovereign rating further into junk territory.

TOURISM DENTED

Before the Gaza crisis, the tourism sector had been a rare bright spot, expected to grow by 30-40% this year, said Moataz Sedky of Travco Holidays Egypt, a large hotel and resort management company.

Tourism earned Egypt a record $13.63 billion in the financial year to end-June, 2023, up from $10.75 billion a year earlier, according to central bank data.

So far, the Gaza war has affected the popular Sinai destinations of Taba, Nuweiba, Dahab and Sharm el-Sheikh but left the rest of the country relatively unscathed.

Countrywide, net cancellations since Oct. 7 have been 10-12% until the end of April, though hotel occupancy in October grew by 8% over October 2022, said Sedky.

“Winter looks fine so far. Cultural tourism has not been affected really,” he added. “Nile cruise ships between Luxor and Aswan during the peak periods, which is Christmas and New Year, are running 80-90% overall.”

Egypt’s tourism minister told Reuters this week that the impact of the war was contained to under 10% of bookings.

Still, the outlook is far from healthy, said Karim ElMinabawy, president of Emeco Travel, a tour operator in central Cairo. “Reservations are very slow and this is the most worrying,” he said.

GAS DISRUPTIONS

Another potential drain on foreign currency is disruption to natural gas imports from Israel, which Egypt relies on for both domestic consumption and lucrative re-exports.

Israel suspended production at its Tamar gas field on Oct. 9, and gas sent to Egypt at one point dropped to zero, although small quantities have resumed flowing.

Gas supplies to some gas-intensive industries such as fertilisers have been reduced, two industry sources said.

Before the conflict, Egypt was importing 860 million cubic feet (mcf) per day from Israel, or about 15% of its supply, said Siamak Adibi, Principal Consultant & Head of Middle East Gas Team at FGE.

Egypt’s hopes to step up liquefied natural gas (LNG) exports to Europe, after having all but cut them off from May to September as the government implemented rolling power blackouts, have now dimmed.

Egypt had even imported an LNG cargo, “which underlines the North African nation’s current gas imbalance,” said Olumide Ajayi, senior LNG analyst at LSEG.

GULF ASSISTANCE?

In light of Gaza and the risk of regional turmoil spreading, analysts and bankers said Gulf states were re-evaluating their reluctance over the last two years to prop up Egypt’s economy.

“I have felt a change in sentiment in the Gulf, because before Gaza there was very little patience with Egypt,” said Malik.

Saudi Arabia, the United Arab Emirates, Kuwait and Qatar have a total $29.9 billion on deposit with Egypt’s central bank, and have lent another $16 billion in other forms of credit.

Two Cairo-based bankers said they had reports that Gulf countries were discussing a possible financial rescue package involving further cash deposits and support for Egypt’s currency after any devaluation.

Unconfirmed reports in Egyptian media last month said Gulf countries were in talks to deposit another $5 billion. An Egyptian cabinet spokesman declined to comment on any potential support from the Gulf. Saudi and Emirati officials did not immediately respond to inquiries.