Suez Canal Expansion credit-positive, takes time to materialize: Moody’s

PRESS RELEASE: Last Thursday, Egypt (B3 stable) officially opened an expansion to the Suez Canal. The expansion will
support Egypt’s credit quality through increased current account receipts and government revenue.
However, the degree of support will depend on an acceleration in global trade growth, which seems unlikely
to materialize quickly, and we expect only limited credit-positive effects for Egypt during the current fiscal
year, which started on 1 July.

The project included a 35-kilometer expansion that runs parallel to the existing waterway and a deepening
and widening of almost 40 kilometers of the existing canal. The expansion work is part of a wider program
to increase the Suez Canal’s economic contribution, including the establishment of an economic zone for
manufacturing and logistics. The total cost for the expansion of around $8 billion was raised entirely from
domestic sources via the issuance of EGP64 billion (around $9 billion) in five-year non-tradable Suez Canal
investment certificates, yielding 12% per year.

The Suez Canal Authority (SCA) expects receipts from passage tolls to rise to $13.2 billion annually by 2023.
This would be more than double the $5.4 billion recorded in 2014 and equal about one third of total
services and income receipts in Egypt’s external current account. However, this rests on the assumption of
an unlikely sharp recovery in global trade growth, and a doubling in the number of ships using the canal to
97 a day from about 50 currently. Historically, Suez Canal receipts have shown a very strong correlation
with global trade, and based on this correlation, world trade would have to grow by around 10% per year
between 2016 and 2023 to achieve the projected $13 billion in annual revenues

As Exhibit 1 shows, under more conservative scenarios of trade growth and assuming no material change in
the current toll structure, Suez Canal receipts would grow at a much slower pace, thereby limiting the
positive effects on Egypt’s external payments position. We therefore think that the country’s external
current account balance will not swing quickly to a surplus, but instead will post a deficit of around 3% of
GDP in fiscal 2016. On a positive note, the domestic financing of the project will shield net international
reserves, which continued to decline in July to $18.5 billion from an interim peak of $20.5 billion in April.

In line with our expectation of a gradual increase in Suez Canal receipts, Egypt’s government revenues will
experience only a marginal boost. In fiscal 2014, around 7% of total government revenues came from SCA
via corporate income tax and dividend payments. However, growth in SCA-related revenue has been slower
than overall government revenue growth, leading to a declining share. Increased activity from an expanded
Suez Canal would benefit Egypt’s government revenues because it would likely lead to higher corporate tax
payments from SCA and increased dividends. Based on official budget figures, these trends are likely to
continue during the current fiscal year.