Financial Times
Need for funds is at its greatest
By Michael Peel
The booming international oil price may mean that Middle Eastern governments blessed with large crude reserves have never been richer – but neither has their region’s need for finance been so great.
As popular uprisings have occurred from the Maghreb to the Levant, countries have been either gripped by instability or pushed into programmes of heavy spending on state benefits and infrastructure.
At the same time, the eurozone crisis is compounding concerns about the ability of Gulf petrostates and corporations to gain access to financing, as European banks pull back from the Middle East and north Africa (Mena).
The result, according to Moody’s, the credit rating agency, is likely to be a “sustained reduction of lending” at a time when the Gulf Co-operation Council faces an estimated $1.8tn of capital investments over the next 15 years.
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On this story
- Restructuring Debt maturity puts experience to the test
- Sharia compliance Banks hit by a shortage of products
- Stock exchanges Imbalances keep Gulf region on the sidelines
- Bonds Saudi issuance is important signal to companies
- Investment Uncertainty casts a cloud over FDI
IN Arab World: Banking & Finance
- Stock markets Egypt defies the odds
- Sovereign wealth funds Attention turns to the home front
- Islamic banking Impressive growth underscores success
- Private banking Wealthy go in search of better protection
Ashok Aram, Deutsche Bank’s chief executive for the Middle East and north Africa, says the region faces multiple financing difficulties.
Regional banks are experiencing low levels of credit growth as they repair balance sheets. “This can only be solved through a significant expansion in debt capital markets,” he says. “In the short term, the solution is an rise in credit costs for longer term funding and a filtering process where only the strongest deals survive.”
Governments and businesses have been moving to shore up existing funding sources and agonising over how to gain access to fresh ones.
Countries such as Saudi Arabia and Qatar are hesitating on plans to develop their stock markets, torn between the tempting prospect of bringing in more foreign ownership to boost their economies and fear of what fresh volatility may bring.
As European banks withdraw, analysts say Asian financial institutions are already taking up some of the slack, especially in areas such as project finance.
Bankers also say regional companies will increasingly turn to the debt capital markets to service their financing. Looming Islamic bond maturities will prove a test for that growing industry, as traders bet on what could be the first sukuk default in the United Arab Emirates.
On foreign direct investment, political and legal uncertainties have damped growth in countries where there have been uprisings, while creating new possibilities in some states now seen as havens of stability.
Egypt, Tunisia, Libya and Morocco – which has seen protests but not a full popular revolt – have all suffered from higher borrowing costs and stricter credit rules, according to the business and financial services practice of Frost & Sullivan, the consultancy and business researcher.
Egypt, fresh from a presidential election that many hope will restore a measure of stability, suffered a foreign direct investment outflow of $483m last year, compared with an inflow of $6.4bn the previous year.
Many stock markets have proved volatile, with investors torn – and oscillating – between concerns about uncertainty and the sense that these are some of the ripest emerging market opportunities in the world.
Egypt’s stock exchange, having fallen by half last year, has rebounded by about a third this year. Tunisia’s bourse is up a little less than 10 per cent and Morocco’s down a little more than 10 per cent. These two – like those of other countries in the region – have suffered from a drop in European investment because of the euro crisis.
In the Gulf, investors yearn for alternatives to the accessible but thinly traded UAE stock markets. While Gulf markets saw trading volumes of $1.6tn in 2006, that collapsed to $300bn in 2010 and recovered only marginally last year.
Saudi Arabia, the big prize, remains almost off-limits for foreign investors because of rules curbing their participation – a source of frustration, given the market’s broad range of stocks and sprightly trading volumes.
A years-old proposal to merge the UAE’s Dubai and Abu Dhabi bourses – creating a market to rival Saudi’s for size – remains on ice.
Saudi Arabia has been more active internationally on debt financing, where its offerings of Islamic law-compliant sukuk (bonds) have helped drive a brisk world market this year.
The $14bn of sales of sukuk so far this year – in a market in which the UAE is also a big presence – are on course at least to match the $32.6bn of last year, according to figures from Dealogic, the financial data provider.
The biggest Saudi deal was a government-guaranteed 10-year SR15bn ($4bn) sukuk sold to finance the expansion of King Abdulaziz International Airport in Jeddah, but the highlight for many investors was a $1.75bn bond offered by Saudi Electricity Company.
Orders outstripped the offering size 10-fold, reflecting international confidence in the ability of Saudi Arabia – the world’s largest oil exporter – to honour debt obligations even at a time of heavy public spending at home.
Additionally, Dubai made a notable sale, a two-part $1.25bn bond that underscored the emirate’s improved reputation among international investors after its 2009 financial crisis.
Islamic finance is also set to play an important role in the restructuring of the many Arab world companies that ran into trouble after the international banking crisis hit in 2007-08.
Following initial anxiety that the complexity of many sharia-compliant products was hindering efforts to put ailing companies back on their feet, bankers say they are now better placed to deal with billions of dollars of Islamic debt maturing this year.
That has not stopped distressed debt traders from taking an interest in companies whose bond yields are rising because of concerns they may not be able to pull off a restructuring.
Arcapita, the Bahrain-based Islamic investment bank, has filed for Chapter 11 bankruptcy protection, ahead of its $1.1bn Islamic loan falling due.
The fate of a $920m sukuk payment coming due from Dana Gas, the energy company based in the UAE emirate of Sharjah, is also being closely watched.
In project finance, Saudi Arabia – the region’s biggest economy – has led the way, the sector boosted by one of the world’s largest government fiscal stimulus packages.
But while local lenders are piling into the market there are concerns this may not be enough to make up for the exodus of international banks.
Part of the funding gap is being filled by big state investors such as the Public Pensions Agency, the Public Investment Fund and the General Organisation for Social Insurance, or Gosi, which can argue they are fulfilling a public interest by backing deals that create jobs and boost the economy.
Project finance progress is slower elsewhere, although bankers say opportunities are appearing. A cross-country rail project and a new liquefied natural gas terminal are planned in the UAE and there will be huge building needs for Qatar’s hosting of the 2022 football World Cup.
Private equity has, to a degree, defied the political instability in the Middle East, with the number of deals rising 20 per cent last year, even as revolts engulfed the region, according to the Mena Private Equity Association, an industry body.
Thriving areas include healthcare in Saudi Arabia and retail in the UAE, although the activity has a strong pragmatic streak.
Industry insiders say transaction volumes are up partly because more sellers have begun accepting they have to drop prices from the boom-time valuations that once beguiled them.
Many institutional investors remain wary, preferring emerging Latin American, African and Asian markets. It is part of mixed picture that – in financing as in politics – seems to be embroiled in both the best and worst of times.
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