As projects come on stream and more equipment is imported into the Mena region, international banks and ECAs are supporting exporters looking to tap into the burgeoning Mena market. Nick Lord reports.
On the dusty road linking Abu Dhabi with Dubai sits the new Khalifa Port and Industrial Zone. Within its confines lies Emirates Aluminium (Emal), a US$5.7bn project to create the leading hi-tech aluminum smelter in the Middle East. Completed at the beginning of 2011 it is a joint venture between Dubai Aluminium and Mubadala, a UAE government-related company which is tasked with helping the overall economic development of the country.
The Emal project is a showcase for the opportunities that exist in Middle East export finance, which is attracting attention from bankers from developed markets. Huge investment in the region’s social and economic infrastructure is creating business opportunities for exporters from the US, Europe and Asia, all seeking to export capital goods to help with this build. And where the exporters go, so their trade banks are quick to follow.
“Gulf states including Saudi Arabia, the UAE, Qatar and Oman are investing billions of dollars to build smelters, utilising the region’s abundant and relatively inexpensive natural gas as a primary source for power generation,” says Joseph Anis, region executive, Middle East for GE Energy, which is supplying US$500mn of equipment to the Emal project.
The project was conceived before the current troubles that are besetting the region, but given the time lag of such deals, it is only now becoming apparent how important it is for the development of the local economy and for the equipment suppliers. “The project is a cornerstone of the enhanced industrial sector that is planned to help pursue Abu Dhabi’s vision for a diverse and sustainable economy,” says Duncan Hidditch, CEO of Emal.
From social unrest to social infrastructure
Regional bankers all say that there is a boom underway in capital projects within the Middle East, which is fuelling demand for trade finance from equipment suppliers outside the region. Even so, recent political events have affected the market in a number of ways; some clearly negative, but some surprisingly positive.
The big projects that were coming to market in the years after the global financial crisis of 2008 were mainly driven by the need to move the economies of the region away from the dependence on oil and gas revenues. But since the political unrest in some countries in the region, these projects have taken on the additional focus on creating jobs for the indigenous population.
“The infrastructure investment that was happening before the recent unrest was an attempt to diversify the economies away from the hydrocarbon sectors,” says Farooq Siddiqi, regional head of transaction banking at Standard Chartered in Dubai. “But now the infrastructure spending has become much more attuned to job creation.”
As the local population benefits from economic development, so too do the exporters to the region who are tapping into the demand.
The number of new projects and developments has also increased directly as a result of the challenges faced by the countries during the Arab uprisings. According to every banker contacted for this article, the import finance business did decrease when countries such as Egypt, Bahrain, Libya, Tunisia and Yemen rose up. But this has been more than offset by an increase in business that has come about in other countries who are seeking to avoid the problems of their neighbours. The one exception to that is Abu Dhabi, where local sources say that spending has slowed down over the past year, as it takes stock of the problems of over-investment faced by its sibling Dubai.
“Our take is that in the first quarter there was a fall in the business levels but in the second quarter there has been a recovery,” says Standard Chartered’s Siddiqi. “Due to the Arab Spring, the investment into social infrastructure is expected to rise to keep their economies ticking along.”
Saudi Arabia stands out within the region in terms of the sheer volume of social infrastructure projects that are being tendered out as a way to create local employment opportunities. According to research by Citigroup, there are some US$220bn of projects that Saudi Arabia is launching in the next few years, representing some 36% of all construction and infrastructure projects in the Mena region.
Recent deals in Saudi Arabia include the US$989mn financing of the Shoaiba III thermal power plant. This financing secured export credit agency (ECA) backing from Coface (and reinsurance backing by Hermes) for the acquisition of power equipment and services from Alstom.
Kingdom Holdings, run by Prince Al Waleed, recently announced plans to build the tallest building in the world in downtown Jeddah, another project that is likely to come onto the radar screens of export financiers.
But other countries are also digging into their reserves trying to spend their way to peace. Bahrain, where some of the worst unrest of the Arab Spring was seen, has set up a US$10bn fund to invest in new real estate projects. Oman is building a new airport, and Qatar is busy spending billions in preparation for the 2022 World Cup (including the famed air-conditioned stadia).
Even countries that have not seen strong investment-led imports for years are now back on the map. Iraq is seeing billions of dollars spent on refurbishing its oil fields as well as new projects in telecoms, and social infrastructure, as a result of the return of political stability.
Local opportunities for foreign banks
Much of the funding for these new projects is not coming from the local banking groups. Indeed many of these groups are still dealing with huge overhangs of non-performing loans (NPLs) from a drawn out restructuring process started by the global financial crisis in 2008/09. Large local conglomerates borrowed heavily from local banks before the crisis and are now having trouble paying down those debts. Firms such as Dubai Holding or The Investment Dar of Kuwait are in the process of restructuring their debts. But with the absence of clear rules in the region on bankruptcy, there is something of a stasis. As a result, local banks are illiquid and are having trouble taking part in the wave of new projects.
For instance, Credit Suisse analyst Mohammad Hawa wrote in a recent report that he expects the six main banks from the UAE to post a combined level of NPLs of 8.4% by the end of 2011, ranging from National Bank of Abu Dhabi with a NPL rate of 3.2% to Emirates NBD with NPLs of 13.8%.
“UAE banks are yet to experience the peak in their non-performing loans … and will have to adjust to stricter regulatory measures,” wrote Hawa. Ratings agency Moody’s agrees with that assessment, although it forecasts combined NPL rates of 10%, mainly due to the restructuring of Dubai Holding. Banking groups in Kuwait are also going to be seriously affected by the ongoing restructuring, although local banks in Qatar and Saudi are expected to remain highly liquid.
This opens up opportunities for international banks. Jonathan Robinson, head of Middle East project finance at HSBC, has said that the bank’s business has increased by 25% a year for each of the last five years. He is currently working on 20 live projects, although a further seven have been stalled in countries affected by the uprisings.
Deutsche Bank is also bolstering its business, opening up an onshore cash management and trade finance desk in Saudi Arabia to cope with the huge growth in new business. Bank of America Merrill Lynch says that it is opening new lines of business in Morocco and has plans to expand into Egypt.
Without the local banks, the international banks are able to support exporters to the region, alongside the active participation of ECAs and other international development agencies. With the absence of liquid local players, pricing for commercial debt has risen over the past few months, and this means that the pricing of ECA-backed export finance is now competitive.
There is also a change in attitude from the development agencies and ECAs, many of whom had previously not focused on the Middle East, instead trying to push their resources into faster growing Bric countries. But that is now changing.
“In the Mena region, the history of ECA support has not been as active as it has been in other parts of the world,” says Standard Chartered’s Siddiqi. “But now the overall trend for ECA-type deals is positive and Western democracies in particular want to be seen to be providing the region with support.”
This is perhaps best seen by looking at the European Bank for Reconstruction and Development (EBRD). In the aftermath of the Egyptian riots, it announced that it was looking to increase its presence in the region. Some saw this as a way for the US – which is a major shareholder in the EBRD – to gain a useful financing tool in the region. Others suggested that it was really a way for the US to prevent a merger between EBRD and the European Investment Bank (EIB) – in which it has no shareholding. Whatever the deeper motivations, EBRD has moved quickly to find ways of getting finance to the region. On July 29, EBRD’s board recommended that the bank extend its remit to the Eastern and Southern Mediterranean, while also allowing Egypt and Morocco to become recipient countries. It is also examining a similar request from Jordan. Once approved, those countries will be eligible for direct lending as well as participating in the EBRD’s trade finance liquidity programmes, which would support exports to the region.
Also in the development space, the World Bank’s Miga has doubled the amount that it will guarantee in the region to US$1bn. “Our development mandate obliges us to support investment where it is most needed and to fill gaps in the markets,” says Miga executive president, Izumi Kobayashi. “This is precisely why Miga is setting aside capacity for the region at this crucial moment.”
However, it is not all positive; after all, ECAs are still commercial organisations who insure risks. When risks increase, either their premiums have to increase or they need to stop offering coverage. French ECA Coface has downgraded its risk assessments of Egypt, Tunisia and Bahrain, with a consequent increase in the price of coverage for those countries. ECGD of the UK no longer publicly offers terms on Egyptian coverage. Even India’s ECA, ECGC, has ceased coverage of deals going to Egypt, Tunisia and Yemen.
Working through the problems of stalled deals in the affected countries will take time. Messy political situations will mean that projects will stall and exporters to those countries will be waiting to see what will happen. But in the meantime, it does appear to be full steam ahead for new projects and export deals to the more liquid countries. With local banks still weak, this opens up a double win: not only will there be an increase in volumes, but pricing will go up as well. This will be something of a relief to exporters to the region and the financiers who back them.
For the governments in the region who are sponsoring these projects they are seen as a key tool of improving the economic situation of their citizens. Back in the Khalifa Port and Industrial Zone, it is clear that the Emal project is not just about producing aluminium. The country’s website clearly talks about careers, jobs and emiratisation. Projects like this certainly provide the governments with another win win: a diversification away from hydrocarbons and a way to provide their people with meaningful employment