Far East offers fresh finance

29 August 2008

The recent dramatic increase in interbank lending rates in Saudi Arabia is already hitting corporate borrowing costs, forcing a shift in what currencies firms are willing to borrow and where the funding comes from.

As investors speculating on a currency revaluation retreat, local currency liquidity is rapidly falling around the Gulf. Coupled with the measures taken by the Saudi Arabian Monetary Agency (Sama) to reduce inflation by forcing banks to hold more capital in reserve, this means banks are having to pay more for their owen short-term riyal funding.

As a result, the banks are thinking much more carefully about how they deploy their capital, and corporate borrowing rates are rising in response.

The two latest deals to come out of the country are expected to be at least 25 basis points more expensive than they would have been six months ago.

For Saudi companies looking to fund their domestic investment programmes, there is little they can do to avoid the rising cost of debt.

But for corporates and project developers who have suppliers and customers outside the kingdom, it makes more sense to look again at using dollar funding. However, raising funds in the US currency is still not easy, with the credit crunch showing no sign of abating.

To overcome the difficulties in raising large amounts of dollar debt, arranging banks are increasingly looking to bring in lenders from new markets.

As developers look to new suppliers in Asian markets, they have the opportunity to tap into a whole new set of lenders who are keen to support their local partners as they enter the Middle East.

Banks from the Far East may still lack a detailed knowledge of the Middle East markets to participate on a large scale, but they offer the opportunity to access much-needed liquidity.

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