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Infrastructure projects in some Middle East countries will increasingly require private funding due to a diminished ability of their governments to provide direct financing, Fitch Ratings said in a new report.
Government finances in the region came under pressure and deficits widened as a result of the coronavirus pandemic, reduced oil prices and agreed oil production cuts. Many new infrastructure projects in gas-fired thermal power, water desalination, nuclear energy and social infrastructure will increasingly be looking for private funding, including from international markets.
While growing capital markets could offer the required liquidity, scaling up non-recourse project bond issuance would require stable and transparent regulatory frameworks.
Meanwhile renewable energy, emerging as a new growth sector in many Middle Eastern energy markets, is also competing with other infrastructure projects for funds.
Fitch said the size of debt capital markets in the region has increased considerably in the past 15 years and are deep enough to provide large financing. New issuances of both conventional bonds and sukuk almost reached $200 billion in 2020. Abu Dhabi National Oil Company alone has raised $20 billion in bonds in the past three years, of which a part was placed in domestic markets.
However, any further development of the project finance market in the region requires a transparent and supportive regulatory environment. Regulatory frameworks for public-private partnerships and renewables in some Middle Eastern countries are still evolving and even where legal frameworks are already in place, their effectiveness has not been tested, according to Fitch.
Growth in non-recourse bond issuances has been limited so far, despite significant infrastructure funding needs in the region. Higher risks associated with investing in non-recourse debt in the Middle East may become constraining factors for some investors, given investment opportunities in lower-risk home markets.
(Writing by Brinda Darasha; editing by Daniel Luiz)
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