Egypt’s Lone Star

From February issue of Business Today Egypt.

In 1799, Napoleon Bonaparte, awash in visions of monopolizing European trade with India, tapped a team of engineers to design a waterway linking the Mediterranean and Red Sea. They failed, but the enterprise continued to tantalize some of Europe’s finest minds. Seventy years later, the first ships sailed through the Suez Canal. Today, the canal counts itself among Egypt’s most prized assets: repository of national pride, hub of international commerce, and improbable tourist attraction.

Over the past year, it has also emerged as one of the lone bright spots in an otherwise flailing Egyptian economy. While foreign currency reserves plummeted by half in 2011 on the back of a 32% decline in tourism and more than 60% drop in foreign direct investment (FDI), canal revenues have climbed at a steady clip. For 2011, they topped $5.2 billion (LE 31.41 billion) and a 9.5% increase from 2010. The banner year comes in spite of 2011’s upheavals, which have repeatedly reached the canal’s shores. Suez was a hotbed of anti-Mubarak activity during last year’s revolution. Thousands of canal employees launched sit-ins in the port towns of Suez, Port Said and Ismailia. Labor unrest persisted into the summer, as additional protests gripped the coast.

The canal’s success in the face of these obstacles, according to analysts, underlines its independence from domestic factors.

“Global trends are much more of an influence [than local ones],” explained Kevin Cullinane, Director of the Transport Research Institute at Edinburgh Napier University. The canal’s most recent upswing, which began in 2010, corresponds with the global economy’s rebound from the aftermath of the 2008 financial crisis.

After dropping more than two percentage points in 2009, international GDP grew by 3.9% in 2010 with exports rising 14.5% — their largest single-year increase in at least six decades. GDP in 2011 is expected to have picked up another 3.1%. Seaborne trade, which increased 7% in 2010, is also believed to have continued its upward trajectory.

Despite lying in a volatile part of the world, the canal benefits from its image as a reliable corridor for trade. The 1888 Convention of Constantinople, still in effect, mandates that the canal stay open to vessels of all nations in times of peace and war. That hasn’t prevented disruptions in the past; Egypt shut down the canal for more than eight years after the July 1967 war with Israel. But feared disturbances in the wake of last winter’s turmoil failed to materialize and they remain low risks.

According to Jean-Paul Rodrigue, a professor of global studies and geography at Hofstra University, that’s because of the canal’s centrality to international trade.

“The importance of the canal to global trade relations, particularly between Europe and Asia, is such that the international community would not tolerate disruptions,” he says. “[It] would likely intervene if the safe passage of commercial circulation through the Canal was compromised.”

The Suez Canal, which channels approximately 8% of international seaborne trade, has thus flourished alongside the recovery. Shipping tonnage bounced back a combined 25% in 2010 and 2011 after sliding 19% in 2009. Buoyed by these trends, the Suez Canal Authority plans to raise tolls 3% in March, potentially generating millions in additional revenue.

If the canal has piggybacked off the resurgent world economy, it also sits uneasily at its mercy. A downturn — and corresponding dip in maritime trade — would seriously jeopardize its gains. Magda Kandil, the executive director of the Egyptian Center for Economic Studies (ECES), cautioned that Europe’s sovereign debt crisis and frailties in the European and American economies pose grave risks.

In January, Standard & Poor’s (S&P) downgraded the credit ratings of nine European countries. A few days later the World Bank revised its global growth forecast for 2012 to 2.5% from its previous projection of 3.6% just six months earlier. Its report struck an ominous note. In August 2011, S&P removed the AAA long-term debt rating of the US.

“In the event of a major crisis, the downturn may well be longer than in FY2008/09 because high-income countries do not have the fiscal or monetary resources to bail out the banking system or stimulate demand to the same extent as in FY2008/09,” said a World Bank report.

For the Suez, signs of a slowdown might already be appearing. Year-on-year revenue growth in the first half of 2011 reached as high as 16% in three separate months and never dipped below 8.5%. In the last quarter, it consistently hovered around 5%.

An even more immediate threat lies some 2,500 kilometers to the southeast. Amid an escalating war of words since December 2011 between Iran and Western powers, Iran has threatened to close the Strait of Hormuz, the Persian Gulf chokepoint through which about 30–40% of the world’s oil passes. The odds of a shutdown are long.

The US has indicated that such a move would trigger a military response. Besides, cutting off its oil from international markets would be tantamount to economic suicide on Iran’s part. But the situation is unpredictable, and cooler heads have yet to prevail. Any disruption in the oil supply from the Persian Gulf would have a significant impact on canal traffic. Oil tankers, many originating in the Persian Gulf, account for roughly 20% of vessels traversing the canal.

On the flip side, problems in the strait wouldn’t be all bad news for the Suez. A rise in oil prices would make the shorter Suez route to Western markets more attractive relative to rounding the Cape of Good Hope in South Africa. That said, any increase would be hard-pressed to compensate for the loss of tankers from the Gulf. “If Hormuz were to close, the negative effects on the canal would be felt very acutely, at least in the short term,” predicted Cullinane.

And then there are longer term perils. The ongoing shift in global trade away from advanced industrial countries toward developing ones raises the prospect of emerging South–South shipping routes — for example, West Africa to Oceania and the east coast of South America toEast Africa — obviating much of the demand for the Suez. So could the expansion of the Panama Canal, slated for completion in 2014.

Piracy is another. The threat of attack in the Indian Ocean and Gulf of Aden has jacked up insurance rates on travel via the Suez route, incentivizing the longer, but less risky, Cape route. The good news is that Somali piracy, the leading menace in the area, declined in 2011. Thirty-one ships were hijacked by Somali pirates in 2011, according to Stratfor Global Intelligence, down from 49 in 2010. The pirates’ range of operation has also shrunk, thanks in part to countermeasures by navies and shipping companies.

Regardless of how this all plays out, the Suez will remain a vital channel for international commerce. Kandil argues that however well the canal performs, it will not be enough to steer the faltering Egyptian economy onto the right course. The Suez only accounts for 2–3% of GDP, and its contribution to domestic employment is negligible.

“It may have made up for some of the other losses but obviously not fully because you could have a billion dollar increase in Suez revenue and lose another billion or two in tourism,” she says.

In fact, the canal’s strong run of late —combined with healthy foreign remittance rates — might be offering something of a false sense of security.

“People like to reflect on this so that things don’t seem so bleak overall,” Kandil says. “But to plan your strategy going forward around these sources would be a big mistake because both are unstable […] and there’s little domestic policy can do to affect them.”

More than 200 years after Napoleon’s ultimately ill-fated expedition, the Suez maintains an outsize place in the popular imagination. Its contribution to Egypt’s Herculean struggle to rebuild its economy, however, will almost certainly be minor. bt

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