Business | General
Giant Gulf projects face cut-off of funding
Credit crunch and rocketing costs of financing have put a question-mark over many of the planned industrial schemes in region
- By Robin Wigglesworth and Andrew England, Financial Times
- Published: 23:32 September 26, 2008
Abu Dhabi: From petrochemical plants to seaside resorts to entire cities, much of the talk in the Gulf in recent years has been about a swathe of grandiose, petrodollar-fuelled projects planned for the region.
Some of the schemes raised eyebrows as observers questioned their viability; others were seen as sound bets as governments sought to diversify their economies, modernise infrastructure and develop industries.
With an estimated $2,500 billion worth of projects either planned or under way, the developments were deemed an important source of business for international banks and for local institutions basking in the oil boom.
But today, as the credit crunch deepens, financing costs rocket and international banks become increasingly risk-averse, bankers warn that many of the proposed schemes will fall victim to the latest global turmoil as numerous delays are expected. The situation is exacerbated by a squeeze in domestic liquidity.
"I don't even foresee half of them ever being completed," Muth-uswamy Chandrasekaran, head of project finance at Gulf International Bank, says bluntly. "After last week the slowdown [in the project market] could be very big."
He estimates that international banks have been providing between 60 and 70 per cent of the region's project financing.
Given the shaky state of global markets, international banks had become warier of lending since the summer of 2007, but the Gulf's willingness to pay higher fees, coupled with domestic liquidity, had ensured that the ambitious plans stayed on track.
However, the latest mayhem on Wall Street, triggered by the collapse of Lehman Brothers, was a "game-changer", according to an industry expert.
Bankers maintain there is still plenty of capital in the Gulf, but most of it is in government hands rather than in the private sector. The scramble to secure what remains is causing prices to soar.
"Pricing has now approached near-crisis levels. Oil prices have been high ... but most of the money has gone into the central banks of the region, which have recycled it into sovereign wealth funds, rather than the local banks," an executive at a leading international bank says.
A project that could have expected to pay 75 basis points above the London interbank offered rate just a few months ago will now have to pay at least 200 basis points above the benchmark, Chandra-sekaran says.
Some bankers suggest the United Arab Emirates' Central Bank's decision to make available Dh50 billion ($13.6 billion) to inject into the nation's financial system will not be enough to ease local liquidity problems.
Selective approach
A clear result of the market constraints, bankers say, is that there will be a more selective approach to which projects receive financing.
"Financing clearly will be selectively undertaken by international institutions in a time of constraint - they will have to be more disciplined both in terms of type of opportunities they are targeting and in terms of the returns on capital," Mukhtar Hussain, chief executive, global banking and markets for the Middle East at HSBC, says.
"What will have to happen is a prioritisation of projects. Most of the priority projects in the petrochemicals sector and infrastructure are very well conceived in the long term advantages they offer."
A more selective approach may not be a bad thing as bankers sort the wheat from the chaff. Sound government-backed projects are expected to find support, while more questionable schemes -particularly those in real estate - find themselves on the back burner.
It could also ease pressures on resources. The prolonged upswing in the Middle East has created severe shortages of skilled manpower and building materials, such as cement and steel.
"Should the pipeline of announced mega-projects be more spread out as a consequence, then this could be a very good thing for the Gulf," Jeremy Parrish, chief executive of Standard Chartered in Abu Dhabi, says.
"On the one hand, it should alleviate pressure on the banks to finance everything at once, and on the other hand, help bring overall inflation down - due to a reduction in steel and cement prices."
The impact of the liquidity crunch is also likely to vary from state to state. Saudi Arabia, the largest economy in the Arab world and the second-biggest project finance market after the UAE, may prove to be more sheltered from the turmoil. Saudi banks have more capital to invest than most of their regional counterparts, bankers say.
Monica Malek, Gulf economist at EFG-Hermes, says the capacity constraints could lead to a moderate slowdown in non-oil growth, but she adds this may be positive in the longer term. "The current regional boom is being driven by the investment programme and if there are some delays to its implementation . . . it could mean more of a medium-term growth story, which could be positive in prolonging this cycle."
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