Banks in the Middle East are tightening their conditions for extending credit to finance projects despite a sharp growth in demand for funds as a result of a surge in projects.
Turmoil in the global markets in the aftermath of the crippling US sub-prime crisis has also reduced the funding capability of international banks and this could affect the economy and project activity in the region, the Saudi-based Arab Petroleum Investment Corporation (Apicorp) said.
In a study at a Middle East project finance conference in Abu Dhabi, Apicorp said such developments have forced Gulf oil producers and other Arab countries to seek funding for their mega projects from partners on equity sharing basis.
"Although the overall capital structure has slightly shifted to equity, securing the appropriate amount and mix of debt will be considerably more challenging," said the study, presented by Nicolas Thevenot, Executive Vice President of Project and Trade Finance at Apicorp,
an affiliate of the 10-nation Oapec. Despite that shift, loans sought for projects in the region surged by nearly 25 per cent last year to around $49 billion (Dh179.8bn) in 2007.
"With growing risk aversion, the appetite for debt issued in the region may be subdued. The market for project finance is in severe dislocation. Local banks tend to concentrate on local currency denominated tranches, while regional banks lending capacity has overall been reduced by current financial turmoil," he said.
"International banks are credit constrained and confidence in syndication is low and only a few Islamic financing institutions are active in long tenor project finance lending. Quality projects still find financing but on terms and conditions, including pricing, not as borrower-friendly as prior to Summer 2007 and margins are higher by at least 20 basis points," he added.
Thevenot said the problem was complicated by a surge in the energy investment requirements in the six-nation Gulf Co-operation Council (GCC) and other countries in the Middle East and North Africa (Mena). His figures showed such costs jumped to a record $490bn during 2008-2012 review period from only $210bn during 2005-2009. For the Arab region, they more than doubled to nearly $420bn compared with only $175bn.
He said higher costs were a result of changes in the scope and scale of the projects, soaring engineering, procurement and construction costs, rising cost of factor inputs, higher contractors' margins and systematic pricing of project risk.
"Several risk factors could affect the regional macro-economic outlook. They include retrenchment of capital inflow, further postponement of debt issuance, more serious exposure of local and regional banks than initially thought, and inadequate policy instruments to curb inflation," he said. "Other factors include problems such as high unemployment, subdued global energy demand and lower call on the region's petroleum products, soaring EPC costs and scarcity of feedstock for the petrochemical industry.