Accident or terrorism, Egypt crash to set back economic recovery

[CAIRO] Whether caused by terrorism or mechanical failure, the crash of an EgyptAir jet into the Mediterranean is the latest blow to Egypt's efforts to rebuild its economy after five years of political turmoil.

The 2011 revolution, the unrest that followed, and the downing of a Russian airliner last year sapped life from an economy and what was once one of the most promising and fastest-growing tourism markets in the region.

The loss of Flight MS804 on Thursday about 280 kilometres (170 miles) off the Egyptian coast came also as another blow just as president Abdel-Fattah El-Sisi aims to project an image of authority and security to revive growth. Egyptian shares fell as much as 2.1 per cent.

"The worst case scenario for public opinion inside and outside Egypt would be if the accident was caused by incompetency of Egyptian staff at a time when the government is trying to present a picture of itself as disciplined and competent," said Gamal Abdel Gawad, political science professor at the American University in Cairo.

Hours after the plane vanished from radar screens, Egypt's civil aviation minister, Sherif Fathy, said that while ascribing a reason for the disaster remained speculation, terrorism was more likely than mechanical fault.

The EgyptAir plane had traveled around North Africa and back and forth to Europe in the days before the crash, according to jet tracker Flightradar24. After returning to Cairo from Paris on May 16, it flew to Brussels and then made trips to Eritrea and Tunisia before heading to Paris on Wednesday.

Egypt is suffering from a foreign-currency crunch that has slowed economic activity and kept investors away. The country can no longer rely unequivocally on the generosity of its oil-rich Gulf allies, who have provided billions of dollars in aid since 2013 but are now reining in spending amid the slump in crude prices.

The drop in tourism revenues further complicates the task of bridging a US$12 billion annual funding gap expected in the coming few years.

The central bank's effort to curb the black market for dollars and attract investments are yet to bear fruit. In March, it devalued the pound, promised a flexible exchange, and raised interest rates - moves that earned the regulator investors' praise, but not their money.

The current-account deficit, meanwhile, more than doubled to US$8.9 billion in the six months to December, as tourism and remittances plummeted.

Tourism directly employed 1.3 million people, or 5.2 per cent of Egypt's workforce, in 2014, according to the World Travel and Tourism Council. "But its indirect contribution exceeds multiples of that," said Hany Farahat, a senior economist at Cairo-based CI Capital Holding.

The crash could "affect unemployment, consumption and other sectors linked" to the tourism industry, he said.

The number of foreign visitors arriving in Egypt peaked in 2010 at 14.7 million, an almost three-fold increase in 15 years as the country invested in airports, seaside hotels, and cultural tourism.

In 2011, as president Hosni Mubarak was overthrown and revolutions swept the Arab world, arrivals fell to 9.8 million.

They hovered around that figure as the popular uprising led to an Islamist-backed government, political turmoil, and finally a takeover by the military under Mr El-Sisi.

Then came the Russian jet crash which killed 224 people.

Russia, and months later Egypt, blamed a bomb attack and an Islamic State affiliate claimed responsibility. Russia, Britain and Germany suspended flights to Sharm el Sheikh.

Tourist arrivals in the first quarter of 2016 were 40 per cent lower than a year earlier, according to the government. The holiday industry now accounts for about 3.5 per cent of GDP, central bank data show, compared to 5 per cent before 2011.

"Egypt hasn't had a break from bad news, which has had devastating consequences for both tourism and perceptions of the country's stability," said Mokhtar Awad, a research fellow at George Washington University's Center for Cyber & Homeland Security.

BLOOMBERG