Slumping Oil Won't Derail $500 bln Gulf Infrastructure Plan
Posted 18/12/2014 00:00
Such enormous burdens might seem untenable when Gulf states may face a sustained period of lower oil prices, which have almost halved since June.
The International Monetary Fund has also warned some Gulf nations must reduce public spending to avoid burning through their savings.
But governments are now prioritising infrastructure spending and some have methods to avoid the budgetary squeeze.
Saudi funds some of its large infrastructure projects off-budget from a separate central bank account, which contained 514 billion riyals in October.
Both Kuwait's finance minister and the UAE's economy minister were quoted this week as saying reserves would maintain spending on development projects despite falling oil prices.
Using savings for infrastructure seems logical as surplus cash has been put into sovereign wealth funds for years, on the basis that hydrocarbon riches need to last.
The meagre interest rate much of this money attracts currently - Saudi is estimated to invest most of its reserves in low-yielding U.S. Treasuries - could arguably be better spent on infrastructure.
"We have come across situations where there was even a question of using bank financing for projects as they were sitting on large amounts of money getting no interest and so were thinking 'why pay banks?'" said Mario Salameh, project finance head for the Middle East and North Africa at HSBC .
Running down reserves is controversial, with people acutely aware reduced savings could jeopardise future living standards.
For those without huge reserves, namely Oman, Bahrain and Dubai, the loan market has provided cheap finance, which should continue as regional banks are cash-rich.
Upcoming projects include the $3.6 billion Liwa plastics plant in Oman and Aluminium Bahrain's $2.5 billion expansion.
However, a Dec. 2 note from Morgan Stanley on Qatari banks highlighted how a lower oil price will cut the amount of cash deposited in local banks by governments, which will increase loan rates.
Basel III considerations, as the guidelines make it more capital-intensive to back long-dated loans often used for infrastructure, will also affect loan access.
Project bonds have been touted as a potential source of cash, with deals from Saudi and UAE in the last three years.
Issuers have so far been reluctant to take this route, given cheap bank lending and the lengthy process of structuring such trades. Plus, even developed markets with a history of issuance only use them for a small percentage of overall funding.
Another option is attracting pension funds and insurance companies, whose investment strategy matches the long-term timespan of infrastructure funding.
Should Gulf nations wish to do both, bankers argue they should be establishing relationships now from a position of strength, thereby yielding better terms, as opposed to when they may be more desperate in future.
"There is little recognition of urgency in the market and that will only come if it's forced or from a bit of vision to say the current funding model isn't sustainable, much like our hydrocarbons," said one senior project finance banker.
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