Bankers in the project finance sector say the market may be slow in the early part of this year as a result of the political turmoil affecting the region.
Uprisings in Egypt, Tunisia, Bahrain, Oman and Libya, and the threat of protests in the UAE and Saudi Arabia, mean banks will remain cautious throughout much of this year.
Jonathan Robinson, head of project finance for the UK’s HSBC, speaking at the MEED Project Finance Conference 2011 said: “People will be revisiting assumptions that the region is political stable. The common factors across the Middle East have been a very good thing and helped stability over the past few years, but they also mean there is a greater risk of contagion now.”
One reason the market might begin to slow down is that bank credit committees of international banks in Europe may fret about lending to the region after seeing changes in governments and violent response to protests. “We still see the strong fundamentals of the region, but credit committees in London and Paris will see the news and see changes in the government and that will probably mean some caution and some delay in getting loan approvals,” says Christophe Mariot, regional head of structured finance at France’s BNP Paribas.
“I believe we are at the stage where banks will adopt a wait and see approach following the geopolitical events in the region,” says Rajan Malik, head of syndication at Bahrain’s Gulf International Bank.
Although projects may face delays, Robinson says good deals will still get done. “The key question is whether the project is key to the running of a stable and growing economy,” he says. If it is, then the project will still be able to raise finance.
In the next few months, two projects are expected to reach financial close, the Shams 1 solar scheme and the Shuweihat S3 power scheme, both in Abu Dhabi. Following these, the price of debt is expected to start rising.
A combination of increased funding costs for banks, along with the requirements of new banking regulations Basel 3, mean banks will have to start charging more for loans. Coupled with that, there are still only around a dozen international banks actively participating in the project finance sector, along with a few local banks.
“There is a good pipeline of project finance transactions, but the conditions have changed in the past few weeks. The economic crisis is still biting banks and Basel 3 regulations will bite as well,” adds HSBC’s Robinson.
“The geopolitical situation, along with Basel 3 and the rising cost of dollars means that pricing on deals should go up, but it is up to banks to go and get better pricing,” says Steve Perry, regional head of syndications at the UK’s Standard Chartered.