Moody’s has revealed that it does not expect significant disruption to Egypt’s B2 stable balance of payments from a sovereign perspective, as a result of the Suez Canal blockage.
The ratings agency also said that a temporary disruption will not materially change its expectation of a return to pre-crisis canal receipts as global trade recovers
It pointed out, in its latest report, that the Suez Canal receipts amounted to almost 2% of GDP on average before the novel coronavirus (COVID-19) pandemic, providing a significant contribution to total current account receipts.
“While declining to 1.3% of GDP during the acute phase of the pandemic, Suez Canal receipts have proven more resilient than other cross-border services, such as travel receipts,” Moody’s said, “A temporary disruption will not materially change our expectation of a return to pre-crisis canal receipts as global trade recovers.”
Massive losses
Moody’s stated that, depending on how global and regional volume is calculated, it estimates that the canal’s temporary closure affects around 10-15% of world container throughput.
It mentioned that the implications of delays for global supply chains would, under normal circumstances, not be a big issue. However, very high consumer and industrial demand, a global shortage of container capacity, and low service reliability from global container shipping companies are already causing long delays.
This has made supply chains highly vulnerable to even the smallest of external shocks. In that context, the timing of this event could not have been worse.
“Ships that were about to enter the canal will soon need to decide whether to turn back and use the alternative, longer route around the Cape of Good Hope,” Moody’s added, “That would add around 10 days to their journey compared with the main route that includes the Suez Canal.”
The agency mentioned that the effect of delays on individual sectors is hard to quantify because of the uncertainty on how long the canal will be blocked. However, it believes that Europe’s manufacturing industry and auto industry, including auto suppliers, will be most affected.
It explained that this is because they operate “just-in-time” supply chains, meaning they do not stockpile parts, and only have enough on hand for a short period, and source components from Asian manufacturers.
Moody’s said, “Even if the situation is resolved quickly, port congestion and further delays to an already constrained supply chain are inevitable.”
It added, “Alternative modes of transportation are more or less out of the question, because airfreight capacity is already tight owing to the COVID-19 pandemic, and rail transportation between China and Europe is very limited.”
Meanwhile, Moody’s said that for container shipping, the effect is credit neutral. For carriers diverting their vessels around Africa instead of going through the Suez Canal fuel costs will increase. However, spot freight rates will most likely increase or at least stop decreasing from their currently very high levels.
As a reference, Moody’s said that around 50% of the Asia-Europe volume is shipped at contracted rates which offer little flexibility to offset increased costs due to external events.
Russia’s Gazeta newspaper said that the cost of sea freight has jumped dramatically due to the congestion of cargo ships in front of the Suez Canal, after navigation was disrupted due to the stranded container ship.
The disruption of navigation through the canal is costing global trade about $400m an hour, equivalent to about $6.66m dollars a minute. With the disruption of navigation, the price of shipping one container from China to Europe rose to $8,000, or four times the price compared to last year.
According to a Bloomberg report, the ship’s stranding in the Suez Canal will delay the delivery of oil products worth about $10bn, which may affect oil prices in global markets.
In the event that ships decide to sail using the alternative route through the Cape of Good Hope, sailing time will increase by 9,650 km, meaning that the cost of transporting goods will commensurately increase by at least $300,000
Oil prices rose by over 4% on Friday, due to fears that the Ever Given’s impediment of navigation movement in the Suez Canal could take weeks, which could put pressure on supplies of crude and refined products.
This constitutes a rebound from a sharp drop in the previous session, against the backdrop of fears that demand will be affected as a result of new lockdown measures linked to the coronavirus in Europe.
On Friday, Brent crude rose by $2.62, equivalent to 4.2%, to reach the settlement price of $64.57 a barrel, after dropping 3.8% on Thursday. US West Texas Intermediate crude rose $2.41, or 4.1%, to settle at $60.97 a barrel, after falling 4.3% on Thursday.
Brent increased 0.1% over the course of the past week, while West Texas Intermediate was down 0.7%, its third consecutive weekly loss.
