• Home
• Financial Services
• News Article

Export credit agencies fill finance gap

Speculative, large-scale property developments may have been ravaged by the financial crisis, but the Gulf has continued to invest in infrastructure and industrial projects over the past two years.

However, international banks and capital markets that have historically been the main providers of project finance have yet to fully recover from the financial carnage of 2008 and the resulting global economic downturn.

The value of project finance deals declined 28 per cent last year to $39.7bn in the Middle East and North Africa, Dealogic says.

Nonetheless, export credit agencies - quasi-governmental entities that support domestic companies by guaranteeing or lending to overseas projects - have partially filled the breach vacated by banks and the "shadow banking system".

ECAs either finance or guarantee about 50 per cent of the total project finance market in the Middle East, Jonathan Robinson, head of project finance at HSBC Middle East, estimates.

"Export credit agencies are becoming increasingly important and have stepped up massively to fill the growing funding gap left by a constrained bank market. The confluence of increases in the size and numbers of projects has further exacerbated the gap, and by extension the need for incremental liquidity providers," Mr Robinson says.

While government arms in the Gulf have also increased their equity participation in local projects, ECAs have emerged as one of the most vital sources of capital in the region in the past two years, bankers say.

Piers Constable, Deutsche Bank's regional head of structured trade and export finance, says: "A few years ago we were asking if they were still relevant, but right now a project can't get off the ground without ECA support. I don't think anyone could have predicted how quickly they would come back."

France's Coface, Italy's Sace, Export-Import Bank of the US and the Korea Export Insurance Corporation are particularly active in the region.

The most important, however, is the Japan Bank for International Co-operation , bankers say. Even in 2007, when the Gulf was still booming, JBIC represented one in every 10 dollars of project finance in the region, according to estimates by Moody's, the credit rating agency.

The financial crisis has emboldened the Japanese bank. It doubled its commitments to the Middle East in 2008 and trebled them last year, says Moriyuki Aida, JBIC's chief representative for the region. "We play a counter-cyclical role. We have a duty to respond to the financial upheaval and increasingly supplement the commercial banks,"

Though still cautious, banks and capital markets are again becoming keener on Middle East credit exposure - particularly safe, government-backed and well-structured projects. Some industry figures predict this will lead ECAs to reduce their activities.

"Although there remain some concerns such as Greek debts and capital and liquidity requirements, I expect appetite at international banks to come back this year, which will normalise our activities," Mr Aida says.

ECAs may also come under pressure from their own governments to cut back, says Andrew Davison, head of European, Middle East and African project finance at Moody's.

"ECAs are funded by government money, so it will be interesting to see if they can maintain their current level of activity, given the fiscal consolidation pressures facing many countries," he says.

However, bankers say appetite for sizeable, low-yielding and long-term loans remains weaker than previously, and, given the scale of the projects in the region, predict that ECAs will continue to be vital.

By Robin Wigglesworth

© Financial Times 2010