Suez Canal expansion an opportunity for Egypt

Last Thursday (06/08/2015) saw the opening of the expanded canal which features a new 21 mile channel running in-parallel to the existing channel, enabling more rapid transit for vessels. Yet this only represents a halfway point for Egypt’s plans to improve infrastructure around the canal, with further developments including a network of road tunnels under the canal linking Sinai with the rest of Egypt.

The Suez Canal was once the pivot of the global economy. The route that controlled the distribution of oil for much of the West, it was perceived to be a vital strategic resource. However after the temporary shutting of the canal between 1967 and 1975 the world realized that ships could be routed around it, admittedly at a cost. Consequently a lot of the temperature went out of the role of the Suez Canal. Ironically its importance has probably increased over the past twenty years as the pattern of trade has evolved around exports from China. Today the canal complements the port of Jebel Ali in Dubai, UAE, as the pieces of infrastructure that shape the non-hydrocarbon economy of the Middle East and beyond.

At a cost of roughly US$7.5bn the expansion project has not been cheap, with the Suez Canal Authority financing it with a domestic bond issue. Some scepticism has been expressed about the commercial logic of an investment of such magnitude, justified by the Suez Canal Authority’s business model which looks to triple its present revenues of US$5bn over the next eight years. Certainly the recent market has not been entirely plain sailing for the canal. Shipping volumes shrank during the political instability of 2013 and 2014, as well as during the recession of 2012, with the bounce-back only really emerging through the end of 2014, which saw growth rates in the high single digits percentages. Revenue is growing faster, often in low double digits. However if the Egyptians are to realize their ambitions for growth they will need container freight, and other key trades such as Liquefied Natural Gas traffic to Europe, to grow somewhat faster.

It is worth noting that the Egyptians financed this project domestically at a time when the world is awash with cash looking for a home in infrastructure projects. The cost of doing so was substantial, with the coupon on the five year bonds paying 12%. A high return that attracted investment in an environment of ferocious money printing in Western economies and capital export from China, in spite of the political and business risks involved. Such a scheme was a necessity as Egypt is hardly a country awash with savings to finance projects of this magnitude.

Yet whilst the financial numbers are important they should not detract from the wider picture of what the Suez Canal brings to Egypt and the wider region. By placing itself on one of the major routes of global trade Egypt has the opportunity to tap into supply chains that offer real economic opportunities. With a relatively young and poor population it could offer the sorts of manufacturing and assembly capabilities that have underpinned much of the growth seen in China.

Whilst Egypt the United Arab Emirates are very different in terms of their economic conditions, their experience does illustrate how transformative logistics can be for an economy. The Suez Canal could offer this to Egypt.