The continuing upgrades of Egypt’s Suez Canal may yield long-term benefits for Egypt in the form of increased trade. However, significant political and economic risks remain in the short-term that may undermine these investments.
This last February, the latest upgrade to Egypt’s famous Suez Canal was completed. While not as impressive as last year’s completion of a second channel to the canal, Egyptian Admiral Mohab Mamish was quoted as saying that this new side channel at Port Said will facilitate ships’ passage into and out of the canal. However, while these investments in the canal’s infrastructure may increase trade in the long run, immediate economic and political risks continue to make Egypt a risky investment at the moment.
Gains from trade
The recent upgrades are part of the ongoing Suez Canal Area Development Project, which also includes the construction of new ports and improved transportation infrastructure throughout the canal area. All told, these improvements are aimed at increasing the volume of trade that can flow through the canal, which significantly decreases the length of a sea voyage from Europe to Asia by preventing ships from having to sail around Africa.
By increasing the maximum size of ships the canal can handle, and permitting two-way traffic on parts of the canal, the government hopes to decrease transit time through the canal to 11 hours from 18 hours, and nearly double the number of ships that pass through the canal daily. The duties from this increase in commercial traffic would represent a substantial increase in income for the cash-strapped Egyptian government. This increased cash flow could help the government ensure stability by funding social works programs, making Egypt a more attractive destination for investment.
Wilful ignorance
The Egyptian government’s projections of increased trade are wildly optimistic, however. Crucially, they overlook basic structural economic and political risks in the hopes of luring international investors. By making a supply-driven argument for the canal expansion, for instance, the government failed to adequately evaluate if there was sufficient demand to warrant a canal expansion.
Moreover, due to the recent plunge in oil prices and high tariffs the government charges for use of the canal, many shipping companies have actually found it cheaper to sail around the Horn of Africa instead. Given that some analysts predict the price of oil will remain low for the foreseeable future, it is likely that demand for use of the canal will remain well below what the government had hoped. Because of these market forces, it is unsurprising that the canal reported an official overall decrease in revenue of 5% during 2015.
Egypt is also beset by a variety of political risks which make its investment climate shaky. For instance, al-Sisi’s military government has been unable to deliver public security, as was recently highlighted when an escaped inmate was able to board a plane from Egypt and redirect it to Cyprus.
Meanwhile, the government’s crackdown on Islamists, including the Muslim Brotherhood, has caused the country’s security to deteriorate further, leading to frequent terrorist attacks. These attacks are most pronounced in the Sinai peninsula, where insurgents – including groups affiliated with the Islamic State – have launched attacks against police and security personnel. These threaten the Suez Canal due to their proximity to it.
A risky investment
In short, despite the government’s rosy portrait of the situation, the Suez Canal is a risky investment. While the hoped-for increases in number of ships and tonnage shipped may be realized in the long term, Egypt’s current political and economic problems will undercut these gains for the foreseeable future.