Several Middle East banks are set to reveal losses in their forthcoming results as a result of the US sub-prime lending crisis, according to banking sources in the Gulf.
Until now, many people thought regional banks had little or no exposure to investments in specialised vehicles known as collateralised debt obligations (CDOs), which are at the heart of the crisis at US banks such as Merrill Lynch.
Larger institutions from the UAE and Bahrain are thought to be among the worst affected.
Opec secretary general Abdalla el-Badri tells MEED in an exclusive interview that the producers’ cartel may switch the pricing of oil to the euro within a decade, to combat the dollar’s decline.
The cartel is under pressure from its members, who have seen the potential value of their earnings fall sharply since 2000, as a result of the falling dollar.
The US currency has fallen in value by 44 per cent against the euro over the past seven years.
The Tarabot Consortium, led by Arabian Company for Power & Water Development (Acwa Power), is set to be named preferred bidder for the $2.5bn Saudi Landbridge rail project.
The consortium will edge out three other bidders, assuming its submission complies with the technical requirements of the bid to link the kingdom’s Gulf and Red Sea coasts.
Tarabot is asking for the lowest financial contribution from the Saudi public sector to take
on the 30-year build-operate-transfer deal.
Saudi bank Sabb has agreed to fully underwrite a $745m project finance loan to Saudi International Petrochemical Company (Sipchem), after the eight other banks originally approached to fund the deal took too long to confirm their commitments.
Sabb’s sudden decision to underwrite the whole debt has shocked rival local banks that failed to respond to requests from Sipchem to increase their funding commitments.
The deal will be the first major project finance deal completed this year, and comes after many local banks have predicted that project finance activity will drop sharply in 2008.
The Saudi government is considering compensating contractors for losses incurred as a result
of hikes in the cost of raw materials.
Existing government contracts do not allow for inflation as there are no escalation clauses included to take account of price rises during the term of the contract.
This places all the risk of rising prices onto contractors who, as a result, are becoming more nervous about getting involved in government-led projects.
Several contractors have written to the government calling for changes to the terms of their contracts because they are struggling to deliver projects on budget, and are facing massive losses on fixed-price contracts.
Concerns mount over Saudi economic cities Riyadh is struggling with plans to build six economic cities concurrently and may have to delay some of the mega-developments to prioritise others, say sources close to the projects.
Sources in the kingdom tell MEED that Riyadh is focusing on King Abdullah Economic City (KAEC) at Rabigh on the Red Sea coast at the expense of the five other cities.
Dubai is planning at least two more multibillion-dollar reclaimed island projects. Local real estate developer Sama Dubai is planning Falcon island and another local developer, Bright Start, is planning a development that will also include reclaimed land.
The island planned by Sama Dubai, which looks like a falcon from above, will be built close to the Burj al-Arab hotel.
Contractors in Kuwait are increasingly seeking work outside their domestic market, claiming that the failure of local clients to share the risk of rising materials costs is driving them abroad.
Following the decision by Mushrif Trading & Contracting Company to move its headquarters to Abu Dhabi, several large contractors now tell MEED that the local market is increasingly unattractive.
They say the main problem is the insistence of clients on using fixed-price contracts, leaving
contractors struggling to make their work on some contracts economically viable.
Project finance departments at banks are being told by senior managers to suspend lending in
dollars while the credit crunch drives up the costs of funding in the US currency.
Insiders at banks including Qatar National Bank, Arab Banking Corporation and Gulf International Bank say they are receiving instructions to stop lending dollars on deals with long tenors.
Oil majors seeking to explore for oil and gas in Algeria’s most promising areas will have to offer stakes in their overseas schemes to state energy company Sonatrach.
Algiers says companies must have upstream gas assets in Egypt, Nigeria, Libya, Venezuela or Trinidad & Tobago that they are willing to share with Sonatrach in return for a stake in the Ahnet perimeter. It is the first time a licensing trade-off of this kind has been used in the Middle East.
Contractors with multi-billion-dollar deals on Kuwait’s Al-Zour refinery are concerned over the fate of their contracts, after the project was thrown into confusion by a political dispute.
Oil & Gas Minister Mohammed al-Olaim referred the project’s tendering process to the State Audit Bureau in late August, after members of the National Assembly criticised the award of the contracts for being opaque.
The awards to South Korean, US and Japanese contractors in cost-reimbursable deals worth more than $9bn were confirmed in July.
Contractors in Libya have begun working directly with a new network of state-owned utility firms, in the first sign that plans to disband many of the existing government ministries are taking effect.
Abu Dhabi is fast-tracking the launch of a major civic centre development, the capital district, as part of plans to claw back momentum from its rival Dubai.
The capital district is one of the key developments of the Plan Abu Dhabi 2030 urban masterplan launched in 2007.
Gulf finance houses are sitting on billions of dollars worth of exposure to Lehman Brothers, the US investment bank that filed for bankruptcy on 15 September. Sources in the region tell MEED that local banks are exposed to Lehman Brothers on several fronts, via US bank bonds, derivatives trades where the bank acted as a counterparty, and through investment products structured by the US institution.
Emerging market investment funds have cut their holdings in companies on the Egyptian stock market over fears shares will fall further and the economy will weaken.
One of the largest funds in the Middle East and North Africa, the $1bn EFG-Hermes Middle East & Developing Africa Fund, has reduced its exposure to Egyptian shares from 30 per cent of its portfolio to 9 per cent.
The liquidity crisis engulfing the global money markets has triggered a collapse in the region’s project finance sector, with the number of banks actively pursuing deals plummeting.
Just 12 firms are actively seeking deals, down from more than 45 two years ago, as dollar liquidity dries up and the appetite for long-term funding diminishes.
Any deals that do manage to gain bank support now are expected to cost sponsors at least 150 basis points over the London interbank offered rate (Libor). Just 18 months ago, banks were bidding prices down to as low as 50 basis points over Libor.
International oil companies are being forced to form consortiums with rival firms, after being told by Iraq’s Oil Ministry that companies stand little chance of winning contracts on their own, in the country’s first bid round since the US-led invasion.
Although most oil majors have relationships with rivals through joint venture in other countries, the directive from Baghdad has surprised the firms, which were expecting to bid for fields on a standalone basis.
Dredging work on Palm Deira has stopped as local developer Nakheel scales back its work on the world’s largest man-made island amid growing concerns over the impact the credit crunch will have on Dubai.
Contractors for Nakheel are thought to have been instructed to stop dredging and reclamation work on the outer sections of the island immediately. “We are directing work to complete reclamation in areas closest to the shore, so that once these areas are complete we can undertake progressive land sales and development,” says a Nakheel spokesman.
Saudi Electricity Company (SEC) is planning SR79.6bn ($21bn) programme to award contracts for nine independent power projects (IPPs) between 2010 and 2017, adding 9,360MW to the kingdom’s power generating capacity.
The UAE plans to complete the first stage of the long-awaited inter-emirates rail network by mid-2011, with the entire network complete by late 2015, according to official documents seen by MEED.
The project will be managed by a new agency known as Union Railway. The first phase will be 573.5 kilometres long and serve Abu Dhabi and Dubai.
The second, 246km phase will serve other parts of Dubai, the northern emirates and the east coast.
Dubai-based Emirates NBD, the biggest bank in the region by assets, has suspended loan facilities to expatriate staff at several of the emirate’s biggest property firms, in a sign of the increasingly negative sentiment towards Dubai’s real estate sector.
In an internal document dated 6 November, the bank informed its retail branch managers and loan and credit staff to suspend credit facilities to expatriate employees of the firms due to the current financial crisis and on the basis of “possible restructuring, lay offs and jobs loss” at the firms.
Saudi Aramco has initiated talks to bring down costs with contractors and suppliers, following its review of major projects triggered by the drop in oil prices.
Contractors who have won major engineering, procurement and construction deals on Aramco’s Manifa project were summoned to talks with the firm in the second week of November to discuss how to create more competitive bids.