Clal: The Biggest Risk Is the Suez Canal

The biggest risk to the world economy stemming from the unrest in Egypt is a disruption of operations at the Suez Canal, say economists at Clal Finance. "The primary question is whether the events in Egypt are material to the world economy," Clal macroeconomics analyst Amir Kahanovich said.

Some 10% of all of the world's ships pass through the Suez Canal over the course of a year, and 2 million barrels of oil are shipped through the waterway on a daily basis, Kahanovich wrote. If the cost of passage through the canal goes up because of a takeover of the route by gangs, for example, or acts of sabotage, that would have worldwide impact, he added.

kahanovich - Eyal Toueg - February 1 2011
Eyal Toueg

The Egyptian economy is in fact not that large, but some companies and sectors are exposed, such as European banks, airlines and tourism firms, says the Clal team.

Egypt's gross domestic product is $217 billion. Its debt is $177 billion in debt. for the sake of comparison, Greece's debt is more than $400 billion, Kahanovich says.

"In Arab countries that are more significant to the world economy, such as Saudi Arabia and Kuwait, the standard of living is higher and fears of a revolution or instability are lower," Kahanovich says. The real fear is that the unrest will spread, even to smaller countries like Jordan and Yemen: There is concern that if an extremist takes power, he could carry out some kind of popular act against Israel or the West, he wrote.

Uri Birman, director of Clal's global desk, said that the commodity sector, including oil, gold and agricultural products are attracting attention as a result of the disturbances. Oil rose 4.3% on Friday and rose yesterday morning as well. "The prices are the result of rising concern rather than the extent of supply," he said. "If the crisis spreads to the Gulf states, that would send prices sharply higher, but currently most assessments are thatit won't: the regimes there don't have the negative image of Mubarak's."

To head off the chance that rising food prices would cause instability, some countries in the region might stock up on commodities, which, together with other global macroeconomic factors, could increase prices, Birma said.

The view at Clal Finance yesterday was that the sharp drops posted on the Israeli securities market were not surprising as many investors were disposed to sell. "The stock and bond markets rose sharply recent months. The sell-off shouldn't surprise anyone," said Kobi Feller, Clal's top investment manager. He feels the markets were settling down. "First of all, stocks identified with foreigners, such as banks, shares in Teva Pharmaceuticals and Israel Chemicals are steady," he said. He also noted that credit default swaps , which insure against the default on payouts on Israeli government bonds and shot up Friday, were declining yesterday.