Monday,16 July, 2018
Current issue | Issue 1210, (21 - 27 August 2014)
Monday,16 July, 2018
Issue 1210, (21 - 27 August 2014)

Ahram Weekly

Financing the canal

Investment certificates may be the best way to finance the new Suez Canal project, but there are risks, writes Sherine Abdel-Razek

Al-Ahram Weekly

Starting in early September, Egypt’s three state-owned banks will issue five-year investment certificates at 12 per cent interest to finance the digging of a new 72-km channel parallel to the Suez Canal, along with six underwater tunnels to link Sinai with the Port Said and Ismailia governorates.

The cost of the plan, part of the comprehensive Suez Canal Corridor Development Project, is set at around $8.4 billion or LE60 billion.

The three banks — the National Bank of Egypt, Banque Misr and Banque du Caire — will issue the certificates on behalf of the Suez Canal Authority (SCA) and transfer the value of the purchased certificates to the Central Bank, which will in turn transfer the revenues to the SCA.

 The latter will pay the interest from the certificate revenues on a quarterly basis. The government, represented by the Ministry of Finance, will be the guarantor of the certificates, which means it will take over if the SCA fails to meet its obligations to certificate holders.

Linking the Mediterranean and the Red seas, the Suez Canal is the fastest shipping route between Europe and Asia and currently yields $5 billion annually.

Only Egyptians will have the right to buy certificates for the new development. They will be offered to residents in pound-denominated certificates with values of LE10, LE100, and LE1,000, and in dollar-denominated certificates for Egyptians living abroad, at an interest rate of three per cent.

“While issuing certificates is the least complicated way to finance the project, as opposed to shares or bonds, allowing only Egyptians to invest is not the right decision,” said Hani Tawfik, a financial expert and chairman of the Arab Private Equity Association (APEA).

The decision to finance the project through investment certificates rather than shares is based on national security concerns, as shares give their holders ownership and management rights while certificates are like an interest-bearing loan with a limited duration, he explained.

Limited liquidity in the local market, however, could undermine the overall value of the subscription, he said, a shortcoming that could have been overcome by opening the sale up to foreigners, especially as the certificates do not give ownership rights in the new canal.

“The expected offering will absorb most of the liquidity available within the banking sector, leaving limited space for lending to the private sector and thus negatively affecting investments,” Tawfik said.

 Bearing an annual yield of 12 per cent, the certificates offer a considerably higher return when compared to certificates of similar duration and savings accounts in public banks, where yields range between 8.75 and 9.75 per cent.

Nahed Ahmed, a pensioner, told Ahram Weekly that she would withdraw her money from an investment account at the National Bank of Egypt to invest in the new certificates. “It is not only a matter of a higher yield, but it will also be the least risky investment given that it is guaranteed by the government,” she said.

While the rate of return is somewhat attractive it is still not the highest for loans with a similar duration. Some private banks offer savings instruments of the same duration at 12 per cent interest, said Omar Al-Sheneety, director of the Multiples Group, a regional private equity firm.

 Nevertheless, thousands of Egyptians, including Ahmed, still prefer to deposit their money in state-owned banks.

Al-Sheneety said that the local banking sector is unlikely to be hit by the issue.

 In the past, banks have used depositors’ money to invest in high-yield treasury bonds, with rates of 14 per cent — spiking to 16 per cent at times of political instability — thus making a profit from the difference between the interest rates they pay to depositors and those they get from investing in public debt.

 Al-Sheneety added that the government is now giving high yields directly to individuals through the new investment certificates, depriving the bank of an important source of income.

According to his calculations, almost 44 per cent of banking sector deposits are invested in treasury bills and investing more of this sum in certificates will leave no liquidity in the sector.

 The pressure on the banks will not be over if they decide to buy the new certificates. According to Minister of International Cooperation Naglaa Al-Ahawani, if the issue fails to cover the required sum of LE60 billion, the government will approach the banks for a syndicated loan.

 Experts believe that even in the best-case scenario the offer is unlikely to yield more than LE20 billion.

The fact that returns on the certificates will be covered by Suez Canal revenues has also raised concern. “The canal revenues are the only sustainable source of foreign currency,” said Tawfik. “Using them to pay the returns will put an additional burden on the state, especially since there have been no feasibility studies showing that increases in revenues are expected any time soon.”

Egypt has been suffering from a drop in its foreign currency resources since the 25 January Revolution, as political instability has stripped it of foreign investments and tourism revenues.

On Monday, the Ministry of Finance issued a statement saying that it expects revenues from the Suez Canal to more than double within the next four years to more than $13 billion.

But a release by the Popular Front for the Suez Canal Corridor, a pressure group formed in 2013, saw things differently. “This increase will not be realised in the short run as the capacity of the canal is today about 78 ships per day, but the traffic does not exceed 46 ships daily. There will also be no additional fees levied from ships passing through the new canal,” the statement said.

 Any increase in the number of ships and thus in revenues will have to be linked to a revival in international trade and the economic development of the corridor, according to the group.

“A lot of information is missing. The feasibility study for the project needs to be made available to the public. We can’t invest all this money on expectations of a 200 per cent increase in revenues based on a projected growth in international trade that usually does not exceed three or four per cent annually,” Al-Sheneety said.Meanwhile, another competitive shipping route, the Panama Canal linking the Atlantic and Pacific oceans in Central America, is also being expanded with a third set of locks being built to allow bigger ships to pass through the waterway.

This project, which will likely affect the volume of trade passing through the Suez Canal, is due to open in 2016.

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