Thomas White Global Investing
Egypt
Egypt Stamp
December 5, 2008
A Postcard from the Middle East
Egypt: Piracy a Big Threat in the Suez Canal

Ships in the Suez Canal face serious piracy threats from Somali pirates Due to the global financial crisis, Suez Canal revenues have already dropped from heady highs in August 2008. But piracy also remains a huge threat. This was highlighted by the recent capture of a Saudi Arabian supertanker loaded with $100 million worth of oil by Somali pirates, one of the biggest ship hijackings in history. The canal made $467.5 million in October, down from $504.5 million in August when a record 1,993 ships traversed the Canal.

Pirates were once romantic characters who populated 18th century English adventure novels. But not anymore. Pirates have made a comeback in flesh and blood in today’s world and Egypt is one of the most affected. Recently, a U.S. cruise ship narrowly wriggled out of the pirates’ clutches and a Yemeni cargo ship was miraculously released without ransom. Its Achilles heel is the 120 mile long Suez Canal, which for the past 140 years has been a vital shortcut linking the U.S. and Europe with the Indian Ocean and its Asian ports. Today, the Canal faces an enormous challenge as attacks from Somali piracy are forcing an increasing number of shipping companies to choose alternate routes, avoiding the Canal. The Canal, which Egypt nationalized in 1956, runs between the Red Sea and the Mediterranean and the only access from the Red Sea to the Indian Ocean is through the Gulf of Aden. So far this year, Somali pirates have attacked almost a 100 vessels, and successfully hijacked 40 in the area, according to the International Maritime Bureau.

Egypt depends heavily on the fees it charges these ships for permission to pass through the Suez Canal. In 2008 alone Egypt earned $5 billion in Canal fees making it the third largest source of income. The Canal is also one of Egypt’s major sources of foreign currency and continued acts of piracy can damage this inflow of revenue. The gravity of the situation is evident in a country of 82 million where 20% live on just $2 a day. Already grappling with double digit inflation, Egypt is at risk of floundering in deeper waters even if income from the Canal posts the slightest of declines.

Although Egypt’s financial sector has not faced the brunt of the global financial fallout, goods traffic in the Suez Canal has started to slow because of tardy world economic growth. The U.S. is Egypt’s largest trade partner with a volume of trade reaching $7.7 billion in 2007. Egypt also benefits to a large extent from the ever increasing export volumes from Asia to the U.S. and is always looking to steer containers via the Suez to U.S. East Coast ports. The Canal gets 3,000 to 5,000 containers a week from trade between Asia and the U.S. but with world finances crumbling, this medium of profit has also suffered a setback. Piracy in the Suez could potentially create a bigger dent in Egypt’s economy, posing a threat to investment in Egypt, which has driven the Egyptian economic boom for the past four years.

Egypt is now mulling over a solution to tackle the depletion of the source of its third largest revenue. The country has joined hands with Yemen, Saudi Arabia, Sudan, and Jordan among others to try and forge strategies for combat. But until then, piracy in the Suez Canal continues to be a sieve draining away highly valued foreign currency for Egypt.

Image Credit: Official U.S. Navy Imagery on Flickr under a Creative Commons License

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