20 March 2016

The Suez Canal

The Suez Canal Authority (SCA) recorded revenues of $5.175 billion in 2015, or 5.3 per cent less than those in 2014. This is partly due to the decline in international currencies against the dollar, used for payments to the Suez Canal, but the global economic crisis and declining oil prices have also contributed to the falling revenues.

The decline in oil prices has made it cheaper for shipping companies to take the route south around Africa, for example. The decline in revenues also occurred despite the SCA boasting an increase in the number of vessels and tonnage transported through the canal: 17,483 vessels and 998.7 million net tons went through in 2015, compared to 17,148 vessels and 962.7 million net tons in 2014.

In August 2015, the Suez Canal expanded with the building of a second waterway, which the authorities have predicted will increase annual revenues from $5.3 billion to $13.2 billion. However, some observers warn that these expectations may be unrealistic and note that canal receipts are related to the state of global trade.

In order for revenues to reach official estimates, Moody's, a ratings agency, calculates that global trade will need to grow by around 10 per cent a year between 2016 and 2023. The average growth rate during the last 25 years has been only five per cent.

Foreign direct investment

In the fiscal year ending 30 June 2015, foreign direct investment in Egypt (FDI) rose by 54.6 per cent to reach $6.37 billion, the highest since the 2011 Revolution, numbers from the Central Bank of Egypt (CBE) show. According to the CBE figures, Arab investment increased by 51.6 per cent and European Union investment by 3.5 per cent.

However, net FDI in the 2014-2015 fiscal year dropped by 34 per cent in the fourth quarter to $690 million compared to the same period the year before. This has made some observers ask what happened to the agreements for $38.2 billion of FDI, plus the potential deals of up to $92 billion made at the Egypt Economic Development Conference in Sharm El-Sheikh last year.

The ambitious New Capital Project, valued at $45 billion, was announced in June 2015, but despite the government's efforts to keep it moving, it has still not begun. The large transport projects worth around $8 billion to $10 billion, to be carried out by Chinese Port Engineering, have not started, and the future of the projects seems uncertain. On top of that, only half of the contracts for the reported $33 billion real-estate deals have been signed.

Minister of Investment Ashraf Salman said last September that Egypt needs FDI worth $10 billion, along with LE400 billion in domestic investment, to reach the targeted five per cent growth rate for the 2015-2016 fiscal year. However, the first quarter of fiscal year 2015-2016 saw FDI worth only $1.4 billion, meaning that there is a need for $8.6 billion for the remainder of the year.

Export slump

Exports, an essential source of Egypt's foreign currency reserves, witnessed a marked decline in 2015. Non-oil exports registered $20.5 billion in 2015, down from $26.7 billion in 2014 and compared to $29.3 billion in 2013, according to figures from the Ministry of Foreign Trade and Industry. This decline included all exports.

Meanwhile, the imports bill reached $76.8 billion in 2015, compared to $70.8 billion in 2014. The fall in the value of exports and the increase in imports payments caused Egypt's trade deficit to increase.

Experts attributed the decline of exports to two main reasons: serious fuel shortages and the foreign currency crunch that hit the industry sector in 2015.

Over the past year, the government reduced the supply of energy to energy-intensive industries and increased the supply to power plants that provide energy to homes. Gas supplies to factories decreased by around 22 per cent in 2015, according to the Egyptian Natural Gas Holding Company.

As a consequence, a large number of factories slowed down production to between 20 and 40 per cent of their capacities, while others were obliged to shut down on the back of energy shortages. The second reason is the dollar crunch, which has made it difficult for manufacturers to obtain the hard currency needed to import raw materials.

Moreover, the two devaluations of the official price of the pound against the dollar in 2015 (in late January, from LE7.14 to LE7.53, and in July, to LE7.73) had a negative impact of Egyptian exports. With the dollar on the rise, the pound has often outperformed currencies such as the euro, making Egyptian products and services more expensive and uncompetitive in the euro zone.

The European Union is Egypt's largest trading partner (accounting for 38 per cent of total exports and 31 per cent of imports), followed by the Arab countries (28 per cent of exports and 13.5 percent of imports).

Officials further attributed the decline in exports to political instability and wars in some Arab countries, including Libya, Syria and Iraq. In 2015, Egypt's exports to Libya fell by 56 per cent and to Syria by 50 per cent.

Solid remittances

Remittances are the second most important source of foreign currency in Egypt after commodities exports, amounting to $19.3 billion in the fiscal year 2014-2015.  

Egypt has a significant expatriate population in the oil-rich Gulf countries, and this helped the country to come in sixth in the list of top recipients of remittances transferred to developing countries in 2012, according to the World Bank. Given the current dollar crunch, Egypt's three state-owned banks have recently issued US dollar and euro-denominated certificates to Egyptian expatriates in a bid to attract their savings.

The international ratings agency Moody's, however, is sceptical about the effect of issuing the certificates. It has said that while remittances from abroad in 2015 were around $20 billion, according to World Bank figures, only a small part of these is captured by the banking system as their recipients usually withdraw the funds from the banks to benefit from higher rates on the unofficial market.

Although remittances have been a robust source of foreign currency for Egypt since the revolution, there are fears that dwindling global oil prices will affect them negatively because large numbers of Egyptians work in the Arab oil-exporting countries. A decline in the incomes of these countries will result in salaries standing still and perhaps to a decline in job opportunities, especially in the private sector.

This may reduce remittances of expatriates in the Arab oil-exporting countries, putting more pressure on the Egyptian pound against the dollar and other major currencies.

Faltering tourism

Contributing around 12 per cent of Egypt's GDP, tourism is a mainstay of the country's economy and one of its main foreign currency earners. This means that any drop in tourism means lower hard currency income, which in turn puts more pressure on the Egyptian pound.

The sector was hard hit by the political turmoil following the 25 January Revolution, and it has experienced a series of hits since then; most recently, the downing of a Russian plane in Sinai that killed 224 people on 31 October last year.

Egypt's tourism income dropped to $6.1 billion in 2015, compared to $7.3 billion in 2014, with a total of 9.3 million tourists visiting Egypt last year, 600,000 fewer than in 2014. In addition to the Russian plane crash, the sector suffered a series of setbacks in 2015, including the accidental killing of 12 Mexican tourists and their Egyptian guides in the Western Desert in September, and several terrorist attacks by Sinai-based militants affiliated with the Islamic State (IS) group.

But it was the plane crash that had the most devastating effect on the tourism industry. Only one million tourists visited Egypt in November and December last year, down 41 per cent from the previous year and the lowest number during these peak months since at least 2005, according to data compiled by Bloomberg.

The harsh impact came as a result of the halting of flights to Sharm El-Sheikh by the UK, Russia and other countries, leading to cancellations at the popular Red Sea resort's hotels. Russia and the UK send the largest number of tourists to Egypt: in 2014, Egypt received around three million Russian tourists, making up a third of the 9.9 million people who visited Egypt that year.

As the flight suspension continues, the situation for the tourism sector is getting worse, with occupancy rates in Sharm El-Sheikh declining by 90 per cent and in Hurghada by 80 per cent.

This has led to the shutting down of many hotels in Sharm El-Sheikh and Hurghada and many layoffs. Elhami Al-Zayat, the head of the Egyptian Tourism Federation, told Al-Ahram Weekly that the sector has lost some 900,000 workers since the 25 January Revolution, representing half of the sector's workforce.

The government is now pressing ahead with plans to revive and support the sector. Until flights to Sharm El-Sheikh resume, however, tourism is unlikely to rebound. At its peak in 2010, tourism earned a record $12.5 billion for the country, with more than 14.7 million tourists visiting Egypt.

© Al Ahram Weekly 2016