Oil price to push Gulf projects to private finance, says report

Rating agency Standard & Poors estimates that $604 billion worth of project contracts will need funding between now and 2019, Gulf News said.  

The majority of these projects are likely to be in Saudi Arabia, the UAE, Kuwait and Qatar, the report said.

Standard & Poor’s credit analyst Karim Nassif told Gulf News: "Overall bank liquidity in the Gulf region started to weaken visibly in the second half of 2015, and we expect a similar trend this year. Gulf banks traditionally generate the bulk of their funding from locally raised deposits, and GREs [government related entities] are important depositors in these markets. Given lower energy prices, we have seen erosion in this segment, which triggered a slowdown in the growth of local deposit markets in 2015, particularly in the UAE and Qatar."

The dropping bank liquidity is causing a rise in local interest rates including the EIBOR [Emirates Interbank Offered Rate] and SAIBOR [Saudi Interbank Offered Rate], Standard & Poors said, according to Gulf News. This makes alternatives like capital markets and the private sector more attractive, Standard and Poors said.

"Given our expectations for continued weakness in deposit growth, we believe banks will be more selective in their balance sheet allocations, particularly toward longer-tenor lending facilities, and we generally expect the cost of bank borrowing to increase in the Gulf," Nassif told the news site.

"We see [projects] turning to alternative means of funding such as public private partnerships (PPPs). The concept isn’t entirely new in the Gulf, where it is established for power and water, and which could be a model for other sectors. Plus, we see that governments are starting to pave the way for this sector to grow," Nassif said.

Dubai passed a law in October to encourage new projects to be developed under the PPP model, following reports that the Qatar government is also increasingly interested in the model.

"Given the gap between the Gulf’s huge infrastructure capital needs and the ability and willingness of sovereigns to continue to foot most of the bill, as well as their moves to develop PPPs in their countries, we believe that the private sector and the capital markets will be playing a larger role this year and in years to come," Nassif told Gulf News.

Dubai-based finance expert Amir Ahmad of Pinsent Masons, the law firm behind Out-Law.com said: "This an incredibly interesting time for those observing the markets in the Gulf. Partially as a result of the falling oil prices, banks are indeed faced with liquidity constraints. This in turn results in financing by banks becoming more selective."

"The stage appears to be set for the emergence of alternative finance providers and large private equity injections into various sectors of the market. A greater role appears to be emerging for capital markets and for public-private partnerships in the future of infrastructure development in the region," Ahmad said.

The largest project in the UAE will be the extension of Dubai's Al Maktoum international airport, which is currently expected to cost $32 billion, followed by the $20 billion Al Gharbia Chemicals Industrial City in Abu Dhabi, Gulf News said.

Qatar projects include QRail, which aims to connect Qatar to neighbouring countries before the World Cup in 2022, while Kuwait is focused on refinery projects related to Kuwait National Petroleum, it said.