• Country risk is back

More than two weeks of protests in Cairo's Tahrir Square came to an end last week with the resignation of president Hosni Mubarak in a move which Egyptians hope will lead to a freer, democratic state.

Hotel and tour operators will also be hailing the end of the disturbances which have disrupted not only the country's political life, but the wider global travel network which it is part of. As Egypt works to reinvent itself, the hotel market must also reflect on how best to deal with the actions of those resident in the countries where it does business.

The protests in Egypt, and in Tunisia, have acted to remind operators that picking new locations to work in is not just a matter of finding a pretty beach or an ancient monument and opening a hotel. The geo-political state of nations varies globally and, particularly in times of economic crisis, can prove volatile.

After 30 years under Mubarak, both Egyptians and observers round the world are wondering what is next for the country. In the immediate future, the country has been put under military rule, which is not a significant change to its position under Mubarak. There are fears that, mirroring his reluctance to leave, the senior officers in the military will also be unwilling to give up power, seemingly confirmed by comments over the weekend that they would rule for six months or more while elections are scheduled, and will rule by decree.

Leaders in the West have called for the new power base to start the move towards democracy, beginning with free and fair elections, in the hope that this will create the stability required to keep Egypt, which is the cultural capital of the Arab world, close.

The question for the region is now where next? With protestors in Tunisia gaining confidence through the example of those in Tahrir Square, the country is expected to be next to see new leadership and other countries, including Yemen, Syria, Algeria and Jordan are being encouraged to bring in reforms to their regimes before they face similar scenes to those in Egypt.

With authoritarian societies based around a combination of oil wealth and/or support from foreign governments coming under pressure, those who operate in them are already counting what looks set to be mounting costs.

Last week Thomas Cook and TUI Travel cancelled all flights to Luxor due to depart up to and including 16 February and said that the unrest in Egypt had cost them, respectively, £20m and £30m. TUI Hotels & Resorts said that Egypt could have an additional Eu2m impact in Q2.

Speaking at their fourth-quarter results, Starwood CFO and vice chairman Vasant Prabhu said: "The political turmoil in North Africa, especially Egypt, is of course hurting our business. We expect that our fees will be hit in North Africa. It is too early to tell how we will be impacted, but this is clearly a risk that needs to be closely monitored." Starwood has 16 hotels across North Africa that generated between $10m and $12m in fees last year.

More than one million tourists were in Egypt when the protests started in late January, and most left earlier than planned as unrest spread across the country.

Egypt had been one of the most developed travel markets in the Arab region, and, with its resorts in Sharm el-Sheikh, has attracted visitors from, predominantly, the UK, Russia, France and Germany on package holidays to take advantage of the cheap winter sun, visitors likely to be significantly deterred by the threat of rioting. These resorts are now empty, with hotels in the area expected to start readmitting travellers in March, according to the country's foreign ministry. The more expensive Spain and Canary Island resorts have been picking up the slack.


HA Perspective: The Economist, in its February 10th edition, published a chart detailing the countries in the Arab world that had the most potential for unrest. The top three on the list were Yemen, Libya and then Egypt at number three.

Almost at the bottom was Bahrain. And it is this that will give hotel investors the most pause for thought. Whereas it can be argued that countries like Yemen are obviously a significant risk, Bahrain, ranked below the likes of Morocco and Oman, is something of an outlier.

Until Tunisia and Egypt, who would have given the usual risk warnings about potential political upheaval more than a second glance in any investment proposal for most of this region? It is now a very different scenario.

Alongside country risk is a new found scepticism amongst the global investment community towards emerging markets. In the month to mid-February, a net $5.44bn had been withdrawn from emerging market funds according to fund tracker EPFR Global thanks to fears of political instability and, for countries such as China, India and Brazil particularly, worries about inflation.

Just as the recent crash proved property prices don't always go up, investors need to understand that the better yields in emerging markets are being offered for a reason. Whether it is a hotel property investment or the establishment of a fee business operation, the returns need to be higher than in the West to justify the risk.

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