The American business community is already feeling the impact of Congress decision not to renew the authorisation of the Export-Import Bank of the US (US Exim).
The bank has been unable to engage in new business or to process applications since 1 July and some members of Congress hope to permanently shutter the export credit agency (ECA).
The lapse in authorisation for US Exim is causing frustration for American companies looking to do business in the Middle East and North Africa (Mena) region. Meanwhile, their competitors from around the world are happy to plug the gap and grow their own market share in the region.
US Exim is traditionally most active in the aviation sector, followed by the hi-tech, power and refining industries. Some 75 per cent of its $2.1bn of long-term loans and guarantees approved for Middle East countries in 2013 and 2014 were for the aviation industry, with most of this directed at UAE airlines.
Chicago-headquartered Boeing is the top beneficiary of US Exim globally, according to the US free-market thinktank Mercatus Center. In 2013, US Exim provided more than $900m in long-term guarantees to UAE-based aviation companies to finance the purchase of Boeing aircraft, followed by another $284m in 2014.
I do not expect a wholesale slowdown in projects directly attributable to the US Exim suspension
Maarten Wolfs, PwC
Dubais Emirates was the second-biggest foreign beneficiary of US Exim financing globally between 2007 and 2013, securing more than $3.3bn in financing, and leading to accusations of unfair subsidies by Mercatus. Abu Dhabis Etihad Airways is also a major borrower.
US Exim guarantees less than 15 per cent of Boeings commercial exports, Bernard Dunn, president of Boeing Middle East and Africa, told MEED in July. The manufacturer says it will continue to do deals in the region, although the banks shutdown will require different types of financing structures to be used for aircraft purchases.
Many of the GCC airlines with big Boeing orders can still finance their jets in several ways, says Saj Ahmad, chief analyst at UK-based StrategicAero Research. Firstly, there is cash flow out of their existing operations. You also have Islamic banks in the GCC and other instruments such as sukuk [Islamic bonds] to raise funds. And finally, there is Boeing Capital Corporation [BCC], which will provide backstop financing as a lender of last resort.
It is expected that smaller airlines from other Middle Eastern countries that have more restricted access to credit will be most in need of BCC financing.
The freeze on US Exims activities will favour Boeings main competitor, French aircraft manufacturer Airbus, but the firms sales are not expected to fall dramatically as order books are built up far in advance.
It will make it harder for Boeing to clinch sales, but given the orders received to date, it is doing just fine and that proves that while the [US] Exim loss to airlines is a headache, its not a show-stopper by any means, says Ahmad.
For instance, Qatar Airways increased its 777X orders this year – a jet that Airbus has no response to. So even though [US] Exim may not now be an option, airlines will buy jets based on their need first, rather than solely who gives out credit the easiest or cheapest.
The banks closure is also starting to cause headaches outside the aviation sector. A petrochemicals megaproject in Egypt, owned by the local Carbon Holdings, is relying on US Exim as the main financier. The firm is unable to reach financial close on the scheme as a result.
During this period while US Exim is not able to work on new business, Carbon Holdings is looking to finalise negotiations with the engineering, procurement and construction contractors, which has meant the overall project development schedule has not been affected, says Mohamed Helmy, the companys director of corporate finance and investor relations. However, the longer this situation continues, there will inevitably be repercussions both on our project and on other projects throughout the region.
The $7bn project is set to be financed with assistance from four national ECAs: US Exim; Export-Import Bank of Korea (Kexim); Korea Trade Insurance Company (Ksure); and Italian Export Credit Agency (Sace).
US firm GE is supplying technology, and is also responsible for bringing US Exim participation on board.
US Exim is well accustomed to supporting downstream oil facilities and power projects for which American companies have provided technology. It extended the largest loan in its history, worth almost $5bn, for the development of the $13bn Sadara chemicals complex at Jubail in Saudi Arabia in 2013, thanks to Dow Chemicals involvement in the project.
US Exim has not responded to requests for comment and clarification on its project pipeline or on how many schemes are affected.
However, observers say there are few projects that have reached a stage where US Exim is irreplaceable. Alternatively, other ECAs might cover US products as part of a wider package.
I do not expect a wholesale slowdown in projects directly attributable to the US Exim suspension of activities; there are plenty of deals in finance at the moment, but nothing hanging in the balance, says Maarten Wolfs, partner and head of infrastructure finance in the Middle East at the UKs PwC.
If youre sponsoring a project and one of your banks pulls out for reasons other than credit risk, you engage with a wider community of commercial lenders and ECA banks, and advance the transaction on that basis.
But while ECAs have eased their country procurement criteria to increase their competitiveness, they are unable to lend on projects disproportionately to the involvement of companies from their home markets. This means US firms may lose out.
The amount of lending depends on procurement from our own country, says the Middle East head of an ECA. If another ECA drops, out we cannot automatically increase our participation.
Observers expect that this is hurting American technology suppliers, but are as yet unable to quantify how much they are affected.
The main disadvantage will be for small US manufacturers, as larger companies have flexible supply chains. We produce the same products in the EU and China as in the US, says a sales manager at a major US company. So we are sourcing from there instead, and clients can still get financing leverage with their ECAs.
Smaller US-based exporters will be at a disadvantage to suppliers from other countries that can access credit guarantees and export loans.
Several projects would have included US procurement in the sourcing competition, but couldnt without the prospect of support from US Exim, says Ken Hansen, partner at US law firm Chadbourne & Parke and formerly general counsel at US Exim. Not every business can reallocate production, so this unilateral disarmament has left US businesses – especially smaller firms without offshore production facilities – unable to compete with other countries.
With Congress returning for its autumn session, the business community is hopeful a renewal of US Exims authorisation can be passed. But right-wing politicians connected to the Republican Tea Party movement continue to oppose the banks existence. They perceive it as encouraging cronyism and welfare capitalism for big firms such as Boeing and GE.
The campaign is led by libertarian billionaires David and Charles Koch. Such is the influence of their funding that the majority of Republican candidates for the 2016 presidential elections support eliminating the bank. Despite criticisms that the move would harm US manufacturing, the politicians who oppose the bank are not making U-turns.
Its theology over reality, says Hansen, Theyre pursuing their philosophy of small government in disregard of the collateral damage to US workers and the US economy.
There is some pressure on US Exim to sell off its loan portfolio and wind up. The consequences of this are still unclear, but it would struggle to find buyers for such a large and unusual portfolio. US Exims Mena exposure as of September 2014 was $15.2bn, or 14.4 per cent of the total. Companies exporting from the US are already finding other sources of finance, but commercial banks may not be interested in buying up emerging markets and small-scale deals.
The US business community, led by the National Association of Manufacturers (NAM), which calls the bank a critical tool for trade for manufacturers of all sizes and missions, is lobbying hard for the banks reauthorisation. These efforts led to the Senate passing a transport bill with the reauthorisation tacked on in late July.
Businesses of all sizes are affected by US Exims lapse, says Linda Dempsey, vice-president for international economic affairs at NAM. For some small-to-medium-sized businesses, exports make up the majority of their sales and they depend on US Exims programmes to help move their products overseas. Without US Exim, businesses like these are left in a holding pattern, with companies re-evaluating how to continue their export activities.
The next struggle is bringing the matter to a vote in Congress, where it would probably pass. House majority leader Kevin McCarthy, who opposes reauthorisation, sets the calendar.
Most observers predict US Exim will continue to exist, and are hoping Congress will reauthorise the bank soon. It is likely political supporters will eventually attach an amendment to another bill. This will be temporary, says Hansen. Even if the bank is abolished, they would likely see the problem, and the opportunity, and establish a new [ECA] within a few years. But it would be silly to lose the momentum and infrastructure we have now.