Egypt's economy: hit by Houthis, dependent on Israeli gas

MSC container ship in Suez Canal credit: Shutterstock
MSC container ship in Suez Canal credit: Shutterstock

The war in Gaza has been a disaster for Egypt's economy, plagued by debt and a collapsing currency, as shipping shuns the Suez Canal.

Israel's war in Gaza has proven particularly problematic for Egypt, which isn't even directly involved in the fighting, which has spread to many fronts.

The attacks on Red Sea shipping have dealt a severe blow to the Suez Canal while Egypt is unable to take any drastic action against Israel for its ongoing maneuvers in the Gaza Strip because it needs Israel's natural gas. All this while Egypt's President Abdel Fattah El-Sisi is coping with a debt crisis, soaring inflation, and a currency that is collapsing.

The Red Sea and Suez Canal

The Suez Canal contributes 2% of Egypt's GDP and the worsening crisis in the Red Sea following attacks on shipping by Houthi rebels has seen traffic through the canal fall by 64% in the early weeks of 2024, compared with the corresponding period of 2023, less than 50 ships per day instead of 138. In January an average 43 ships per day passed through the Suez Canal with only 34 ships sailing through on January 31. In January 2024, Egypt earned $428 million from the Suez Canal, down 47% from $804 million in January 2023, even after tariffs were raised 5%-15% in the middle of the month - the tariff hike was announced in October prior to the crisis.

According to maritime consultancy firm Drewry, sea traffic around Africa's Cape of Good Hope jumped 168% in January from 77 ships to 206. Sailing around Africa lengthens the voyage from East Asia to Europe by 30% and reduces effective shipping capacity, according to Drewry, by 9%.

With all this in mind, London-based Arab newspaper "Al-Araby Al-Jadeed" reported last week that Egypt had asked the Houthis to focus only on Israeli vessels. While the Iranian-backed Houthi rebels in Yemen aimed to damage ships with Israeli connections only, the damage to the Suez Canal was negligible. However, immediately after the Houthis intensified their attacks on ships that visit Israel, and in fact targeted almost all of the shipping giants, significant damage to the passage through the Suez Canal began. Egypt had hoped that the US-led naval defense force would alleviate the situation, but so far has been disappointed.

Natural gas in the shadow of the war

Six weeks before the war broke out in October, Israel's Minister of Energy and Infrastructure Israel Katz approved increasing natural gas production from the Tamar offshore field to six billion cubic meters (BCM) annually from 2026. This represents a 60% increase in the production capability of the gas field compared with today. Of the amount produced, 3.5 BCM will be exported annually to Egypt.

After the outbreak of the war the Tamar gas field stopped operating for a month and this disruption in supply emphasized how dependent Egypt has become on Israeli gas. In October-November, peak season for liquefied natural gas (LNG) exports as the northern hemisphere prepares for winter, Egypt was unable to liquefy gas at its Idku and Damietta LNG facilities. Tamar's activities and gas liquefying activities have since resumed but not before Egypt understood the importance of Israeli gas to its economy.

Today, Egypt fears and opposes the expansion of the IDF's operations in the southern Gaza Strip to Rafah and the Philadelphi route along the Gaza-Egypt border. Egypt is concerned that Palestinian refugees will flood into the country. However, Egypt's pressure on Israel has been futile while it also remains eager to broker a ceasefire to stop the fighting.

Moreover, the summer heat is fast approaching when natural gas consumption in Egypt itself jumps 30% above the annual average. Meeting these energy needs of the country with the 15th largest population in the world (about 110 million) is a tremendous challenge.

The 60.7 BCM of natural gas consumed by Egypt in 2022 constituted about 37.3% of Africa's total gas consumption. Al-Sisi is not building in the summer on gas liquefaction, but on natural gas, so that it will serve his citizens. In the absence of Israeli natural gas, there will very likely be a shortage in Egypt. History shows that one of the reasons for the outbreak of the Arab Spring protests in Egypt more than a decade ago was a lack of water. If Egyptians do not have electricity at home, similar unrest could return. Egypt consumes natural gas from Israel, both for local demand and for liquefaction, with Israel's Leviathan reservoir accounting for 83% of exports and Tamar the rest. Last year, gas consumption in Israel was 12.7 BCM and 9.2 BCM was exported, including 4.62 BCM to Egypt.

Debt crisis and currency crisis

Egypt is in an exceptional debt crisis. The country's enormous debt has swelled in recent years to more than $160 billion following mounting loans taken in the El-Sisi era. In the past decade, the Egyptian president has announced several ambitious projects, but the financing was done through loans from large banks and China, instead of investments from the Gulf countries, on which Egypt had relied for many years.

Egypt did not initiate this change but rather the Gulf countries began to choose more profitable investments over subsidizing a poor country. Geopolitical events in recent years have also severely damaged Egypt's economy. The Covid pandemic hit global trade and profits from the canal. The war between Russia and Ukraine raised the price of wheat, of which Egypt is the world's largest importer. The war in Ukraine also hurt tourism revenue, because tourists from these countries stopped coming, depriving Egypt of valuable foreign currency.

A significant part of the loans taken by Egypt came from the IMF, which over the years has lent the country more than $11 billion. Egypt is finding repayment difficult after profits from the Suez Canal and tourism have suffered. Egypt is currently holding discussions with the IMF to obtain aid funds, after a $3 billion aid package was stopped last year, because Egypt did not implement necessary reforms, including the demand to see a change in the fixed exchange rate of the Egyptian pound.

Egypt insists on keeping the pound exchange rate fixed at 30 pounds to $1, while on the black market the pound is much weaker, and trades at a rate of 70 pounds per dollar. A previous IMF aid package stalled last year precisely on this point.

Instead, Egypt recently raised interest rates sharply to 21.25%, in an attempt to serve two aims: appease the IMF, and cut inflation, which fell to 33% in 2023, after peaking at 38% earlier in the year.

Egypt is expected to devalue the pound for the fourth time since 2022. The devaluations so far total 50% of the currency's value. It is possible that another devaluation will bring the money that the Egyptian government craves, but will raise the risk of soaring inflation.

"Reuters" sees growth in the current fiscal year (which began on July 1) of just 3.5%, down from the forecasts at the beginning of the year, of 4.2%.

Published by Globes, Israel business news - - on February 8, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

MSC container ship in Suez Canal credit: Shutterstock
MSC container ship in Suez Canal credit: Shutterstock
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