GCC states look to boost foreign equity investments (page 1 of 2)

A recent report by ratings agency Moody's Investors Service found that Asian banks are likely to boost lending to Gulf countries in the next two years, to fill a funding gap that may emerge as European banks scale back regional business. The report said that the six GCC countries would pursue around $1.8trillion in capital investments over the next 15 years, amid a retreat by European banks in the wake of Greece's sovereign debt crisis, and fears over the future health of the Eurozone.

As of end-September 2011 European banks accounted for some 40% of the GCC's foreign financing, a state of affairs which risks exposing the GCC to funding shortages, just as it plans to implement wide-ranging social spending and infrastructure development programmes in the wake of the Arab Spring. So far, export credit agencies (ECAs) have stepped in to help out: ECAs from South Korea and Japan were among lenders that helped Qatar Petroleum raise $7.2bn for the Barzan gas field in the Middle East's biggest syndicated loan last year. And analysts believe that more foreign funding will best enable the region to deliver its ambitious development programmes over the next decade and beyond.

"In order to fund the gap, you will need capital from outside the region as well as within the region," says Adil Marghub, Manager, Infrastructure Cluster, Mena, at the International Finance corporation (IFC), a member of the World Bank Group which finances and provides advice for private sector ventures and projects in developing countries. He notes that the Gulf, once an exporter of capital, is left relying on ECAs from outside the region to plug the infrastructure gap: "A region exporting capital is now importing capital to meet some of its infrastructure needs."

Policymakers, too, now realise how greatly development in the Gulf will depend on the region's ability to attract foreign equity. Capital which might once have been sourced primarily from operate & maintenance contractors, developers, tenants or end-users, government sponsorship, or local investment groups established for the express purpose of investing in infrastructure and development projects, is now being sought abroad.

"The critical component for this region, when we look at equity, is sourcing foreign equity, and infrastructure is great for bringing in foreign investors, and for creating the Foreign Direct Investment that this region would like to have on a greater scale, because infrastructure provides predictability in cashflow and low volatility," says Faris Mansour, Senior VP at financial services provider Macquarie Capital. "When it comes to financing it comes down to what risks are inherent in the asset itself, and in infrastructure it comes down to the risk of cashflow. The key point is that the debt tenor must match the profile of the asset - its cashflow ultimately - and this is where a lot of groups get themselves in trouble, using short-term debt to finance long-term assets."

Dubai model could hold key to rebuilding confidence in regional development projects

Many such examples might be plucked from the rubble of Dubai's early-century boom. Emboldened by the emirate's astonishing growth, public and private entities reached for short-term financing in order to fund long-term investment, leading to a bubble that proved unsustainable when the global financial crisis hit.