Suez Canal expansion hoped to spur energy investment in Egypt

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Monday - 18 May 2015

Egypt hopes the prospect of higher foreign currency receipts after the completion of the Suez Canal expansion in two years’ time will alleviate some of the concerns over investing in the country’s power sector.

The weak Egyptian pound and a scarcity of US dollars have become the main worries for foreign investors and commercial lenders, according to the International Finance Corporation (IFC).

Companies that use the Suez Canal pay fees in dollars, euros, yen and other approved currencies, and the government estimates that by 2023 annual earnings from the 146-year old waterway, which connects the Mediterranean and Red Seas, will more than double to US$13.2 billion from $5bn in 2013.

“The Suez Canal expansion should help bring in sufficient dollars to the country in the next couple of years,” Jai Assani, a senior investment officer at the IFC, said at the Middle East and North Africa Solar conference in Dubai last week.

The Egyptian president Abdel Fattah El Sisi announced last August that the canal, which handles 7 per cent of global trade, would be expanded, with an investment of $8.5bn, to include a new lane for two-way traffic in part of the waterway.

The navigation of the first ship through the extended area is scheduled for August this year and capacity will increase to 97 ships a day by 2023 from the current capacity of 49 ships a day.

Companies and individuals have complained of not having access to enough hard currency to fund regular business activity, resulting in a black market for US dollars. In recent months the government has relaxed the ban on companies transferring money abroad and allowed the pound to weaken somewhat, but it still will not provide foreign currency beyond the country’s “basic need” such as raw materials and food.

Funds received from GCC countries helped to lift Egypt’s net foreign reserves by 34 per cent last month to $20.5bn compared to March, enough to cover almost four months of imports.

This month the central bank sold a record $298.8 million to lenders at its regular currency sale to help meet the gap. This was four times the typical amount sold during such a period since it started the weekly auctions at the end of 2012.

Deutsche Bank said yesterday that while “there were some concerns about the low level of FX liquidity ... The balance of payments is expected to improve because of a pickup in tourism, Suez Canal revenue and capital inflow”. The IFC estimates that the total amount of investment needed for renewable energy projects in Egypt is between $7bn and $8bn.

Lamya Youssef Abdel Hakim, the head of private projects at the Egyptian Electricity Transmission Company, said the early entrants to the power sector would be larger companies that were able to recycle local currency in other investment projects.

“I’ve heard from some large developers that they are ready to [start construction] even with the current situation of currency as soon as we release the power purchase agreement, which is expected at the end of this month,” she said.

However, Michelle Davies, the head of clean energy at the UK-based law firm Eversheds, said only a limited number of companies had the ability to place local currency into other projects.