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External sources sustain GCC project financing despite low oil prices

Image used for illustrative purpose. 
Construction workers are seen on the site of a newly constructed bridge that is nearing completion at the Jahra roundabout in Kuwait City September 1, 2011.

Image used for illustrative purpose. Construction workers are seen on the site of a newly constructed bridge that is nearing completion at the Jahra roundabout in Kuwait City September 1, 2011.

Reuters/STR New

Sunday, Jun 05, 2016

Dubai: Project funding across the GCC has remained largely resilient despite a sharp decline in oil prices that has resulted in shortfalls in government revenues and budget deficits across the region, thanks to external sources keeping the funding tap open to infrastructure projects, according to industry experts and analysts.

According to first-quarter data on GCC projects complied by the Middle East Economic Digest (MEED) and Abu Dhabi Commercial Bank, the data for GCC as a whole continues to show the cautious approach being taken by governments and corporates with focus on key projects. However, the value of awards was still higher than between the third quarter of 2008 and the third quarter of 2009.

“We believe this partly reflects the fact that foreign funding remains accessible, unlike during the global financial crisis when it was largely cut off,” said Monica Malek, chief economist of ADCB.

The value of UAE projects awarded rose by 15.1 per cent, quarter-on-quarter in the first half of 2016. Bahrain and Kuwait reported increases of 77.1 per cent and 242.1 per cent in projects awarded during the first quarter, on a quarter-on-quarter basis, while on Oman and Bahrain saw yearly increases in project awards.

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Saudi Arabia, Qatar and Oman saw the sharpest quarterly falls of 42.9 per cent, 45.7 per cent and 48.2 per cent respectively, in value terms, while for GCC as a whole the value of project awards contracted by 14.8 per cent quarter-on-quarter and 45.6 per cent on a year-on-year basis.

Lower oil prices have clearly constrained the amount of funding available to GCC governments to finance capital and infrastructure projects, forcing them to look at alternate solutions.

“Spending in the region will need to be better prioritised in order to ensure it meets social and economic development. Governments will have to seek private sector involvement, innovate and find alternative funding sources to fund their project requirements,” said Cynthia Corby, audit partner and Middle East Infrastructure and Capital Projects leader at Deloitte.

Despite the tightening of liquidity in the regional banking sector and budgetary constraints on governments due to declines in oil revenues, most essential infrastructure projects continue to be on track as external funding is still available.

Asian and European export credit agencies are increasingly providing funding or finance guarantees to help their contractors secure projects. One such example was the $2.9 billion (Dh10.65 billion) LNG import and regasification terminal in Kuwait being awarded to a consortium led by South Korea’s Hyundai Engineering and Construction.

“In many cases, preference has been given to contractors who can help fund projects,” said Malek.

Japanese banks have also become more active in project finance alongside the syndicated loan market due to the negative interest rates back home. Greater syndicated loan funding, again due to the negative interest rate environment in Europe and Japan, is also boosting GCC projects.

Oman in particular has relied on the foreign project finance market due to its tighter fiscal position. The country’s well-tested private/public partnership models have benefited especially from access to foreign funding.

In some cases governments are directly supporting the projects market. For example, Qatar’s Ashghal (Public Works Authority) has indicated that contractors will receive 20 per cent advance payments. This will come into effect on June 13, and is aimed at supporting projects and boosting construction sector liquidity.

Despite such initiatives, the general theme in 2016 across the GCC has been one of payment delays, requiring greater short-term borrowing from banks to meet contractors’ cashflow requirements. Late payments were particularly notable in Saudi Arabia in the first quarter, though the government indicated that it has started to clear its arrears (which began in April).

Reflecting such fiscal pressures, market indications suggest that the Saudi government may look to issue ‘I owe you’ (IOU) notes to contractors to help cover outstanding dues.

In the case of Bahrain, wider support from other GCC countries has been vital in helping to fund projects. The main project awarded in the first quarter was the $1.1 billion expansion of Bahrain’s international airport with 83.5 per cent of the funding coming from the Abu Dhabi Fund for Development. This was part of a $2.5 billion grant provided by the UAE to Bahrain in 2013, as part of the GCC’s development programme for the kingdom.

By Babu Das Augustine Banking Editor

Gulf News 2016. All rights reserved.

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