Egypt’s economic lifeline runs through the Suez Canal

Egypt’s economic lifeline runs through the Suez Canal

Given the political uncertainty and public unrest following the ouster of President Mohammed Morsi, the stability of the Suez Canal is vital to Egypt’s economy. However, short-term security mitigation overlooks long-term competition risks from the Panama Canal.

Connecting the Mediterranean Sea with the Gulf of Suez, a northern branch of the Red Sea, the Suez Canal transformed world trade as goods moved across the globe in record time. Now close to 150 years old, the Suez Canal connects points in Asia and the Eastern hemisphere with Europe and the United States, allowing for the movement of goods, oil and military vessels without circumnavigating Africa.

The Canal has remained a reliable and consistent source of funds for Egypt’s government in recent years, bringing in around $5 billion annually. As political and public unrest continues to scare off tourism and foreign investment, the stability of the Suez and the funds it generates have become ever more important for Egypt’s economy.

Following mass protests in late June 2013 against Egypt’s first democratically elected president, Mohammed Morsi, the nation embarked on a “political transition,” removing Morsi from power in favor of military rule. The controversial military coup has drawn deeper divisions between Egyptians who believe a firm hand is necessary to guide the nation through crisis, and Muslim Brotherhood supporters bearing the brunt of a state-backed crackdown on dissent.

Fighting has spilled over into Egypt’s eastern Sinai Peninsula, and militants have stepped up attacks along the Suez Canal. This past September, Sinai-based militants fired rockets at a Panamanian-flagged cargo ship navigating the Canal.

A vital choke point that handles eight per cent of global trade, a disruption of the Suez could increase the price of oil and disrupt global oil supplies. Christopher Knittel, an energy economist at the MIT Sloan School of Management, says oil prices have already begun to rise. “Egypt has made some players in the market very uneasy as to what might happen in the near future with supplies.”

Egypt beefs up security and seeks re-development

Since the attacks in September, Egyptian security and military forces have launched an extensive security campaign along the Suez to counter insecurity. Concerns over the Canal’s safety, however, seem to already have already taken their toll. In its 2013 report, the Suez Canal Authority reported a 6.6 percent decrease in year-on-year vessel traffic, and a 4.4 percent decrease in oil tanker traffic.

In an effort to attract more ships and revenue back to the Suez, Egypt has invited 14 consortia to bid to redevelop the area around the Canal, turning some 29,000 square miles into an international industrial and logistics hub. Egypt is in dire need of long-term development, given both the unrest around the Suez and the nation’s staggering youth unemployment rate, estimated at over 20 percent.

Egyptian officials hope to complete the Suez redevelopment plans by the summer, and begin construction in early 2015. “We must move dynamically… Investors must find service here at an international level because if they do not find it here, they will go some place else,” said Mohab Memish, head of the Suez Canal Authority.

“They will go some place else”

While Egypt tries desperately to curb the effects of political instability on the Suez, the Panama Canal Authority (PCA) has been hard at work redeveloping and expanding its own shipping route. The PCA began expansion work on the Panama Canal in 2007, creating a new lane of traffic and doubling its cargo capacity.

The Panama and Suez Canals are direct competitors, though container-shipping companies have historically preferred the Suez due to its wider travel lanes. When the expansion of the Panama Canal is complete, “it may be seen as a better alternative to the Suez Canal, which is becoming increasingly dangerous for U.S. shippers,” the commissioner of the Federal Maritime Commission said.

The PCA is not the only threat facing the Suez Canal over the coming years. Nicaragua is currently working with a Chinese company to build the “Nicaragua Canal,” connecting the nation’s Atlantic and Pacific coasts and providing another shipping option for companies seeking to transport between Asia and Latin America. Construction of the Nicaragua Canal is slated to start in late 2014.

In the wake of this increased competition, Egypt must continue to take steps to ensure confidence and stability in the Suez Canal. While security and redevelopment are vital to the Canal’s future, Egypt must shift its focus away from short-term solutions aimed at maintaining the economy and toward a longer-term agenda that resolves public unrest and allows for differences in opinion.

With a constitutional referendum just completed and a Presidential election expected as soon as April, the fate of the Suez and Egypt’s economy will continue to unfold throughout 2014.

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.