Tuesday,24 October, 2017
Current issue | Issue 1274, (10 - 16 December 2015)
Tuesday,24 October, 2017
Issue 1274, (10 - 16 December 2015)

Ahram Weekly

New Suez Canal: A hostage of the global economy

The development of the Suez Canal was long overdue but returns have so far been disappointing because of the slowdown in global trade, writes Omar El-Shenety

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Al-Ahram Weekly

The Suez Canal is one of the most important global waterways, with a tenth of the world’s trade passing through it. For Egyptians, the importance of the Suez Canal extends far beyond the thousands of Egyptians who died while digging it 150 years ago. Most Egyptians feel proud when they remember Gamal Abdel-Nasser nationalising the canal in the 1950s to use its proceeds to finance the High Dam in Aswan.

The revenues of the Suez Canal, despite being a strategic national asset, for decades have been too small when compared to its strategic importance. Revenues at best reached little more than $5 billion. For years, experts have been talking about developing the Suez Canal area with master plans proposed to create an added value for the traffic passing, but nothing materialised, at least until recently.

Last year, the Suez Canal region became the focal point of economic development strategy in the country. With the launch of a major development project in the area, people expected it to be for the development of the axis around the canal. They were surprised to find that the development will be directed towards the canal itself, with the widening and deepening of the current waterway, digging a new parallel canal as well as digging a few tunnels under the canal.

The development project, branded the “New Suez Canal”, received huge media coverage as a national project, and LE64 billion worth of investment certificates were raised from the public to finance it. There were still, however, many question about the viability of the mega-ventures from various experts, although the general public was happy to see national projects launched.

Looking at the project from an objective lens, the widening and deepening part looked straightforward: the canal needed to accommodate larger ships, which are becoming the trend in the shipping industry.

Still, digging a new waterway seemed like a very questionable venture. It was supposed to raise the capacity of the canal but the old capacity was not fully used. Saving passing time was an expected outcome, which is definitely positive, but its incremental return is not significant.

Digging tunnels was meant to allow for the smooth flow of people and goods to and from Sinai. It is definitely a positive and will increase local trade as well as development of the Sinai. But digging such tunnels is a long-term infrastructure project.

As such, going for nine tunnels in the short or even medium term is questionable, especially at a time of scarce financing and a huge backlog of delayed investment projects across the country.

With the launch of the new canal, reality turned too far from expectations, simply because of the latest dynamics in the global economy. The coincidence of recession in Europe with the economic slowdown in China has resulted in decreased global trade growth, which was reflected in decreased traffic going through the Suez Canal and, accordingly, lower revenues, against all official expectations. Revenues dropped by more than 20 per cent in last fiscal year.

Traffic is dependent on global trade, which has fluctuated over the last decade, growing at around eight per cent during 2004-2007, then declining by more than a tenth during 2008-2009 as a result of the financial crisis, then recovering its losses in 2010-2011.

After that, it maintained a slow growth rate of between two and three per cent during 2012-2014, before declining in 2015. Such developments have been directly reflected in the fluctuation of Suez Canal revenues.

With the current negative trade growth outlook, Suez Canal revenues are not expected to live up to official estimates and will probably stay lower than 2013-2014 levels for the coming couple of years, before global trade picks up again.

The decrease in dollar revenues is definitely bad news for the Central Bank. After deducting interest expenses on the certificates, the net cash going to the government will witness a considerable decline in the short term.

The Suez Canal Authority shouldn’t have a problem covering interest expenses and, later on, refinancing the certificates when they mature by issuing new certificates. Hopefully, in a few years, global trade will recover and revenues will rebound to repay the cost of the expansion project, but this will take quite a long time to happen. In addition, the return on the tunnels will take years if not decades to materialise given that tunnels are long-term infrastructure investments.

Despite the disappointing results of the New Suez Canal, the government proceeded with the development of the Suez Canal axis with the launch of the development of the East Port Said area. This includes digging a new waterway connecting the port there with the Mediterranean, and establishing a few industrial zones and new residential extensions to Port Said and Ismailia cities. A few highways will also be established to connect the area with the national road network.

Developing the Suez Canal axis is overdue. The area was neglected for decades, without serious development despite its great potential. The launch of such a development project after disappointing results so far from the New Suez Canal highlights the determination of the government to develop the area and turn it into a key driver for economic development in the country.

In contrast to the New Suez Canal, the development of East Port Said is limited in cost. The new waterway has been on the table for years as it connects the port to the Mediterranean, thus easing access to the port without the need for ships to go through the Suez Canal, which should reflect positively on competitiveness of the port and its revenues.

However, it is unclear how much the new waterway will cost and how this cost will be allocated between the Egyptian government and port operator.

The development of East Port Said should revive the area. Yet like any infrastructure project, its returns are long term by nature. The development of this phase is not as costly as the New Suez Canal that was launched last year, while its long-term sustainable returns could be much higher.

From an economic standpoint, the development of the axis, including projects like East Port Said, should have taken priority over digging the New Suez Canal.

Despite such huge potential, the materialisation of these results depends heavily on foreign investments. The new industrial zones are expected to attract foreign investors and companies to establish plants and global logistics centres in the area, which would lead to hiring people that move with their families to live in the new residential areas. As a result, the new road connections will be used to move people and goods across the country.

Foreign companies should be interested in being present in such a strategic axis but probably not in the short term. The negative global economic outlook means that companies will shy away from making big investments.

The turbulent political and security situation regionally will also mean that investors follow a “wait and see” approach. So again, the development of the Suez Canal area has fallen hostage to the global economy, which doesn’t seem favourable in the short term.

Bottom line: the development of the Suez Canal is an indisputable gain and was long overdue, but its returns depend heavily on the state of the global economy. The results of the New Suez Canal have been so far disappointing because of the slowdown in global trade.

The launch of axis development seems like a step in the right direction, but its results will take several years to materialise, given the slowdown in the global economy. This will delay the flow of foreign investment needed to develop the area and achieve the expected results. So we had better manage our expectations.


The writer is managing director of Multiples Investment Group.

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