As international banks rethink their business in the Middle East due to falling oil prices and rising risk, Frances Societe Generale is still comfortable with exposure in the region.
We continue to be committed to the region, says Olivier Musset, global head of energy at the lender. We have invested to grow in the Middle East and our objective is to continue to do so. We will continue to be active in the present context and we are happy to see so many potential projects this year.
With liquidity at regional banks tightening, the continued activity of international lenders will be key to securing finance for megaprojects.
This coincides with GCC governments reviving public-private partnerships (PPPs) and other financing structures to keep project spending off their balance books.
If a project is structured and priced correctly, I would expect the market to respond favourably, says Musset. We are not worried about the market falling short on liquidity.
The likely prioritisation of governments projects pipelines will also help avoid a financing gap.
The GCCs liquidity worries could lead to more opportunities for banks outside the region as it signals the end of ultra-low pricing by domestic lenders.
The GCC has the most competitive pricing if you benchmark it against other regions, says Musset. I would expect pricing to reflect a more difficult market context for oil companies as well as local and regional banks.
Focus on power
Spending cuts are already hitting the hydrocarbons sector, where capital expenditure has been cut by international oil companies (IOCs) and investors.
But the Middle East has avoided the wave of oil and gas debt defaults seen in other regions due to the size of state support for dominant national oil companies (NOCs).
Utility and infrastructure schemes are more likely to go ahead as demand continues to grow. Renewable energy in particular is experiencing a boom.
We are very bullish on renewables, says Musset. There are great prospects for the Middle East to develop renewable energy and we are keen to participate in these developments.
Dubais Mohammed bin Rashid al-Maktoum solar park
Societe Generale is working on financing a wind project in Egypt and is hoping to get involved in the next round of Dubais solar programme, which will have a capacity of 800MW.
This also fits in well with the French lenders climate-change commitments: to double its renewables financing by 2020 and reduce its activities in the coal sector.
We do finance coal, but the projects we finance need to meet our extremely stringent policies on efficiency and types of emission, says Musset. Societe Generale declined to participate in Dubais Hassyan independent coal power project (IPP) for this reason.
Aside from always-active markets such as Dubai and Oman, Societe Generale is looking at Kuwait for upcoming deals.
We have not seen very many deals out of Kuwait for a very long time, which means banks are not at all opposed to Kuwaiti risk on their balance sheets, says Musset. It is really good news to see Kuwait pushing ahead with a lot of projects . They have many opportunities for banks and we are very keen to get involved in the right projects at the right price.
Major upcoming deals include the Al-Zour North 2 independent water and power project (IWPP), the modernisation of Kuwaits refineries in the Clean Fuels Project (CFP), the Al-Kabd solid waste facility and the Al-Abdaliyah integrated solar combined-cycle (ISCC) power plant.
Egypt still risky
But Egypt, another very active market, is much more difficult.
Egypt is in a totally different category of country in terms of rating, so we are not going to consider the same type of political risk content, says Musset. There is more involvement from DFIs [development finance institutions], multilaterals and export credit agencies [ECAs], to give banks comfort about the political risk.
International commercial banks are cautious on long-tenor lending in Egypt due to political and currency risk, leaving a massive project financing gap. DFIs are working hard in Egypt to encourage commercial lenders to become comfortable with extending finance. Commercial banks rely on them for political risk coverage, but cannot take on the same level of long-term risk.
Long-term financing cant happen without strong support from those multilaterals, says Musset. We can expect that on most transactions, and they will be structured in a different way to enable banks to extend long tenors.
Cairo is also relying on support from the Gulf. But this may diminish as lower oil prices hit economies and liquidity.
Whether GCC banks will continue to look at Egypt the same way is a big question mark, says Musset. We are wondering if banks appetite for Egyptian risk is still intact at the same level, given that they will have to prioritise domestic markets when it comes to their capital allocation.
If Egyptian schemes are to reduce their reliance on DFIs and attract commercial banks in the medium term, the countrys business environment will have to improve significantly.
We do finance projects in Egypt, says Musset. Clearly we need the political risk to be well-mitigated, either by multilateral or ECA cover. This is the key element international banks are unable to take full sovereign risk over long tenors in Egypt.
Societe Generales last major lending in Egypt was on the $3.7bn Mostorod New Refinery, which closed in 2010.