Saudi banks lead way to lending

07 December 2010

More banks in the region need to follow Saudi Arabia’s example and return to project lending

This year started with a lot of optimism in the project finance community – 2009 had not been as bad as many thought it would be, and the banking system seemed to be recovering.

In the end, though, deal volumes in 2010 were pretty similar to the previous year. About $27bn of deals will have been done by the end of 2010, compared to about $25bn in 2009.

Pricing of debt has generally come down, indicating that appetite is improving in the banking market, even if the total size of deals done is not.

As 2011 approaches, bankers are beginning to wonder how much capacity there is for funding projects. There is already a number of deals lining up, especially in Saudi Arabia. The kingdom’s development drive means that several multibillion dollar projects will be looking for finance next year.

Fortunately Saudi banks are liquid. They can lend long term, and at quite cheap rates. The drawback is they can generally only do it in the local currency. Most projects want dollars as well. The Saudi banks should get more comfortable with dollar lending in 2011, but projects will still need other sources of liquidity to get deals done.

Outside of Saudi Arabia, there are still only about a dozen international banks actively financing projects in the region. That may not be enough to fulfil all the lending opportunities queuing up for the next few years.

Export credit agencies and other government lenders in the region have stepped up to fill the gap, but unless more banks return to project lending, the sector will struggle to get more than about $30bn of projects financed in a year.

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