The effect on international business of the problems in Egypt and the Middle East

TABLE OF CONTENTS

Introduction

1 Impact on Local Business
1.1 Local Tourism
1.2 Local Property Market
1.3 Automotive Industry
1.4 Banking and Local Business
1.5 Industrial Sector
1.6 Unemployment and Economic Risk

2 Global Impact on business and Industries
2.1 The Suez Canal and Oil
2.2 Global Food Trade
2.3 Cotton
2.4 Tourism
2.5 Corporate Responsibilty on a Global Scale

3 Political Influences which may affect Businesses
3.1 Lack of Socialism
3.2 Short Term Political Impact
3.3 Medium Term Political Impact
3.4 Long Term Political Impact

4 Impact on Shareholder Value and Wealth of the Most
Affected Companies
4.1 Egyptian Stock Market
4.2 International Stock Market
4.3 Impact on Large Companies

Conclusion

REFERENCES

The effect on international business of the problems in Egypt and the Middle East

Renee Stah, May 2011

Introduction

In January 2011, anti-government protests aimed at forcing President Hosni Mubarak to resign, caused riots and a political crisis across Egypt and the Middle East. Lack of economic progress, high unemployment rates, and young people’s zeal for more opportunities and an escape from poverty, sent thousands of protestors into the major cities of Egypt to demonstrate their anger. As a result, an Egyptian Revolution has begun and is having a wide economic and political impact on local business and global trade, and has propagated various economic and political risks in Egypt, the entire Middle East/North Africa region and to some extent, the rest of the world.

1 Impact on Local Business

While protestors rioted in the streets of Cairo, in the cities across Egypt, there was a huge impact on local business. Egypt Air cancelled flights, visitors fled Egypt and tourist destinations became ghost towns. Egyptian banks closed their doors, factories stopped production and a large number of employees were dismissed. Some sectors such as the automotive and industrial sectors are confident in their survival; however the tourism industry and confidence in the Egyptian economy seem a lot more dismal and less likely to improve in the immediate future.

1.1 Local Tourism

Tourism in Egypt represents 11% of the country’s Gross Domestic Product (GDP) and employs 12% of the total Egyptian workforce (Dinar Standard). Since the recent political crisis, foreign governments have declared Egypt unsafe for travellers and nearly one million tourists have abandoned Egypt as a popular tourist destination, costing the country in excess of AU $1 billion in total lost revenue. Egypt’s Red Sea Riviera has also been affected, beaches are deserted and resorts are quiet with staff cuts of up to 50% (Blomfield, 2011). As we have seen in politically chaotic Israel in recent times, when a country relies heavily on tourism, decreases such as these can have profound impact on the country’s economy and create extremely challenging conditions for any improvement.

1.2 Local Property Market

Although the tourism industry has taken a huge hit by the crisis, there is an opportunity for foreign investors to invest in the property market where real estate in popular resorts such as Sharm el Sheikh can be purchased at reduced costs. According to a report from Jones Lang LaSalle, a global commercial real estate firm, the long-term outlook for the Egyptian property market remains positive, creating opportunity for long-sighted investors (International Business Times, 2011).

1.3 Automotive Industry

GB Auto, Egypt’s largest listed automobile assembler, had an income dive of 88.8% (Jones, 2011) following protests. Operations were shut down during the protests, however the company did not experience any harm to staff or distribution. GB Auto has resumed business operations and remains confident that the Egyptian economy and the automotive market are free from risk in the long-term. GK Auto in Iraq which represents about 30% of the auto group’s revenue (Jones, 2011) was not impacted by the political protests in Egypt and continued trading as normal. The automotive industry remains quite confident of its future in Egypt.

1.4 Banking and Local Business

Egyptian banks also closed their doors across the country for an entire week. The Egyptian people were not able to withdraw money and were left with little or no funds to live on. Letters of Credit for international businesses were difficult to obtain and the import /export industry was also negatively affected.

The Arab International Bank holds large accounts of senior Egyptian businessmen and major institutions and individuals within the state system. It is considered a private and discreet bank that assures the secure transfer of funds. According to an unnamed official from the Arab International Bank, several reports indicate that large amounts of money were transferred out of the country before the 25th of January, prior to bank closures (Ramadan, 2011). Although the closure of banks created unrest and loss of confidence in the Egyptian banking system, the large amounts of money allegedly transferred out of Egypt, indicate that some of the country’s senior businessmen may have been informed of the closures in advance, and disruption to their business dealings and transactions may have therefore been minimised.

1.5 Industrial Sector

Although the political crisis in Egypt affected the tourism and banking sectors, the industrial sector claims to remain committed to not dismissing employees and returning to full production (Gulf News, 2011). As Egypt’s largest job creating sector includes 70,000 industrial facilities, this confidence is significant. Egyptian factories are focusing on returning to their highest capacity as soon as possible, since eight million Egyptian families rely on the industrial sector for employment (Gulf News, 2011). Furthermore, Egyptian industrialists have asked government and the media to encourage confidence of the sector so there is no negative effect on industrial investments. Factories insist they will honour all local and foreign contracts to import products and have not indicated any potential risks (Gulf News, 2011).

1.6 Unemployment and Economic Risk

The political crisis in Egypt has impacted tourism, local business and unemployment levels creating a diffident Egyptian economy. Egypt is part of MENA, the Middle East and North African region which has the highest unemployment rate in the world at 23.2 percent (Cole, 2011). Before the crisis, Egypt’s unemployment rate was at 9.7% (CIA World Factbook, 2011). Given the impact on local business during and post-crisis, the country has a challenging task of creating jobs in its current economy. Egypt’s finance minister Samir Radwan has said that Egypt’s economic growth will continue to be affected throughout 2011 which may mean that uncertain times lie ahead for local and global businesses and the Egyptian economy could be a high risk environment for business.

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