20 June 2005

DUBAI -- The current economic boom in the GCC countries has accelerated the overall demand for bank credit in the region, and as a result most banks in the region are forced to look for alternate funding sources, said Adnan Afzal, Senior Associate Research, Corporate, Investment Banking and Markets.

With the lone exception of Oman, all other GCC countries experienced a double-digit increase in lending last year. Saudi Arabia's total disbursements rose by 34.5 per cent to $88.6 billion in last year against a five-year CAGR of 14.8 per cent during 1999-04. According to a recent study by HSBC, the record high oil prices have rewarded all GCC countries with record budget surpluses, encouraging governments to announce large infrastructure projects. The improving macro economic conditions have been reflected in a corresponding increase in the credit off-take in the region.

The outstanding credit has grown at a three-year CAGR of 17.9 per cent reaching $224.9 billion at the ene of 2004. The credit-to-GDP ratio (credit as per cent of GDP) improved by 50.9 per cent in 2004 from 36 per cent in 200, reflecting the growing role of bank financing in the regional economic expansion.

Personal lending and project finance reported big growth during the past 2 to 3 years. At the end of 1999, the GCC banks' share of personal finance stood at 20.2 per cent, which grew, to nearly 30 per cent by the end of 2004. During the last three years, personal lending grew at an average of more than 21 per cent. During the same period the corporate lending grew at 13.4 per cent annually.

From 2002, the project finance picked up momentum in the region. The demand for longer-term funds grew manifold with long-term funding totalling $7.8 billion in 2003 and $17.1 billion in 2004. The lending books of the GCC banks are dominated by corporate loans. At the close of last year, corporate loans constituted 60 per cent in the total bank credit in the region with retail grossing at 30 per cent.

The demand for long term funds seems to continue to grow as a result of the ambitious investment plans announced by all the GCC countries.  Project financing requirements are estimated to total upwards of $2OO billion over the next five years. The bulk of the borrowing needs are likely to be related to the oil & gas and the independent water and power projects (IWPP) sectors and mainly concentrated in three GCC countries, Saudi Arabia, Qatar and UAE.

While a number of banks have been issuing Floating Rate Notes (FRNs), several regional banks are looking at other innovative long-term liability management measures.

Other forms of finance such as project bonds and Export Credit Agencies (ECA) are expected to meet some portion of the growing credit demand. "ECA mandates stringent disclosure requirement and is rarely used by project sponsors and the trends indicate that investor appetite for project bonds has been traditionally low in the GCC region," Afzal said.

Refinancing is a viable option to remove long-term assets from the banks' books. Under this, banks have the option to replace their exposure to grainfield projects with capital market instruments, once the project is operational.

BY BABU DAS AUGUSTINE

© Khaleej Times 2005