The New Suez Canal, which officially opens tomorrow, is set to help plug Egypt’s budget deficit, provide much-needed foreign exchange, and transform the country into a global manufacturing centre, say economists.
But much still depends on the delivery of the government’s ambitious project backlog, and planned business reforms. The development would result in the inflow of foreign currency and increasing government revenues, said economists, which would alleviate Egypt’s chronic shortage of dollars and its long-term fiscal deficit.
The Suez Canal currently earns the government about US$5.3 billion in annual revenues, according to official estimates. The new canal would increase this to $13.2bn by 2023.
Some analysts expressed caution about this estimate, which implies a compounded annual growth rate in canal revenues of 12 per cent. These revenues will come from a doubling of traffic through the canal, the government predicts.
“Projections for doubling of traffic suggest very rapid increases in global trade,” said William Jackson, a senior emerging markets economist at Capital Economics. “That seems overly optimistic.”
The World Trade Organisation expects a 4 per cent rise in trade next year, considerably below the growth rates of trade before the 2008 financial crash, and the use of the canal is highly correlated with world trade growth.
The Egyptian government will run a fiscal deficit of 11.8 per cent this year, according to IMF estimates, with this year’s Suez revenue accounting for about 6.5 per cent of government revenues.
Philippe Dauba-Pantanacce, a senior Middle East economist at Standard Chartered, estimates that Suez revenues will account for about 10.5 per cent of revenues by 2023.
“It won’t make a massive dent in the government’s budget deficit,” said Mr Jackson, “but it’s helpful nonetheless.”
For an economy with an active black market in the US dollar, strong central bank-backed exchange rates lead to shortages of hard currency.
This means that a major benefit of the canal redevelopment will be the influx of new cash.
“The chronic foreign exchange shortage situation is one of the thorniest issues for foreign investors right now,” said Mr Dauba-Pantanacce. The most notable impact of the Suez development would be “a very marginal positive impact” on the availability of dollars, he said.
Beyond the direct impact on the government’s finances, the new canal could serve as a centrepiece for plans to turn the Suez area into a manufacturing centre.
A government scheme to build the $55bn Suez Economic Development Zone by 2030 is likely to have a greater impact on the Egyptian economy’s prospects than the canal expansion alone, according to Mr Dauba-Pantanacce. But “very little has been announced” about this project, he noted.
Angus Blair, the president of the Signet Institute, an economic think tank in Cairo, said it had been bullish on Egypt’s potential to become a production hub, “not least because of its trade agreements with the Middle East, Europe, and North America.
“That’s why Kellogg’s bought out Bisco Misr [a food manufacturer], and Electrolux bought Olympic Group [an appliances manufacturer]. Egypt has a big domestic market and a lot of export potential,” said Mr Blair.
Egypt, the Arab world’s most populous state, has a growing, youthful population, low labour costs and is close to affluent western European markets. That would make it easy to build a manufacturing industry in the country – a tried-and tested route to economic development, said Mr Jackson.
“Manufacturing industries are quite good at importing managerial techniques and technology from abroad, which leads to higher wage growth and improvements in living standards,” he said.
“Manufacturing has often been at the front of productivity gains and technological advancement.”
Economies in east Asia and eastern Europe in particular have benefited from housing German and Japanese manufacturing companies – leading to rapid technology transfer and wage increases, and increasing the attractiveness of those countries for new manufacturing firms. This represented a virtuous cycle that could benefit Egypt, Mr Jackson said.
But the security situation in the Sinai, where terrorists have carried out a number of attacks, nd Egypt’s poor business climate, could make the region around the Suez less attractive to foreign investors, he said.
Analysts agreed that the government now needed to spell out its development plans in greater detail – and what the mooted Suez Economic Development Zone will include – before a final judgment could be made on the likely impact of the plans.
“The government needs to be clearer about how it will develop the region around the canal,” Mr Blair said. “Investors are interested”, he said, pointing to a recent British trade delegation to Egypt. “But the government has to be a bit clearer about what is going to happen.”
Mr Jackson said: “There are a lot of intangibles. It’s hard to get a sense of how this will develop.”
abouyamourn@thenational.ae
Follow The National's Business section on Twitter
