Business, Finance & Economics

The great Suez slowdown


CAIRO — The Suez Canal has always meant more to Egyptians than the revenue it generates. Whether it was the construction of the canal in the mid-19th century, its nationalization in 1956 or the fact that it served as a battle site in the 1973 war against Israel, the canal, to many Egyptians, represents an important chapter in their land’s storied history.

Since then-Egyptian President Gamal Abdel Nasser announced Egypt would nationalize the canal and strip the British of their dominion over it, the Suez has provided a steadily increasing stream of revenue for the Egyptian government.

In 2004, President Hosni Mubarak installed a new economically minded government that has found ways to send canal revenue soaring, and has made the canal a more integral part of the economy here.

Rising oil prices also contributed to the increase in revenue. “As oil prices went up, the canal was able to raise its fees without adding that much to the total cost,” said Omar Radwan, executive director for asset management at Egyptian investment bank HC Brokerage.

But a decline in global trade and the recent boom in high seas piracy have sent income from the canal plummeting and generated worry among economists and government officials alike. (Read about world leaders discussing taking the pirate fight to land, about how to stop the Somali pirates, and about how Somali piracy emerged.)

After tourism and remittances from abroad, the Suez Canal represents the third-largest source of revenue for the Egyptian government. But the government recently announced that the canal's March revenue was 21 percent off March 2008 levels. The government reported $327.9 million in revenue last month, with 1,439 ships passing through the nearly 120-mile long waterway. The government collects revenue based on the tonnage of each ship passing through.

And this is just a continuation of a longer trend. Revenue reached its peak in October of last year and has trailed off sharply since, with February numbers producing the lowest monthly revenue figure in years.

Though both the economic recession and piracy off the coast of Somalia are to blame for the decrease in canal traffic, most experts agree that weak international trade is primarily responsible.

“With this piracy, you will have some cargoes avoiding the Suez. You’ll find some ships going around the Cape of Good Hope,” said Magdy Sobhy, an economist for Egyptian think tank the Ahram Center. “But mostly, the slowing has come from the recession.”

It’s impossible to know exactly how many vessels have re-routed as a result of the pirates, but reports indicate that some ships heading between Asia and Europe are choosing the long way around rather than risking the Gulf of Aden’s lawless waters.

“I think it was a question mark at first,” said Reham ElDesoki, head of research at Egyptian investment bank Beltone Financial. “But the impact from the global recession is so much greater that [piracy] is not significant.”

The canal serves as a major trade highway between Asia and Europe, bringing everything from food and grains to coal, steel and electronics along its waterway. Though a diverse range of goods passes through the canal every year, the Egyptian government is feeling a decline in the oil trade most acutely.

According to Reuters, 30 percent of Europe’s oil passes through the canal, and the oil decline has accounted for a significant portion of the dropoff in revenue.

Furthermore, the impact of declining canal revenue is likely to have serious reach beyond the water’s edge.

For one, Egyptians rely heavily on the government to provide healthcare, education and subsidies for wheat and oil. Declining revenue from the Suez, in addition to a general decline in trade and a slowdown in the tourism industry, is creating pressure for the government to scale back the services it provides. But for a low-income country like Egypt, that drop in services could have dire consequences.

The government decided in March to agree on a $17 billion budget deficit — an increase of 36 percent from last year — to compensate.

Additionally, a decline in canal revenue meant that the Egyptian government has taken in less foreign currency, which is critical to stabilizing the Egyptian pound.

"In the past four to five months, we had a devaluation of the currency," Sobhy said. "This is actually going to affect the prices of everything in Egypt because we export many staples like food and oil.”

Government officials have been frustrated by the slowdown in revenue. Since 2004, aggressive efforts to liberalize trade policy in the country have boosted trade and investment figures significantly.

Though few are willing to predict when the Suez Canal will make a recovery, many are eagerly watching to see if the government will lower canal fees as part of an increasingly urgent need to boost trade and weather the economic recession.

For more on the global economic crisis:Click here for the full report