When Qatar, one of the wealthiest countries in the world, struggles to raise a $10bn syndicated loan, bankers know that the market has shifted for the worse. The gas-rich Gulf state, looking to help fund its budget and maintain infrastructure expenditure for its controversial hosting of the Fifa World Cup in 2022, even found it hard to seal the deal in November after cutting back the size of the loan, bankers aware of the arrangement said.
The issue underlines liquidity pressures faced by regional banks since oil prices halved over the past year, to hover below $50 a barrel. Financiers are worried at the quick outflow of government deposits from local banks and the spillover effect of the oil price slump on future liquidity and domestic credit growth.
“There are a few new money deals getting done, although some have stalled and some have been repriced,” said Robin Abraham, managing partner for the Middle East at the law firm Clifford Chance. “There is clearly a squeeze on liquidity and some inertia in the system.
Governments seeking to sustain capital expenditure and maintain generous welfare payments to their populations have been dipping into their bank deposits and other financial reserves. Saudi Arabia, the region’s largest economy, has seen its foreign reserves decline from a peak of $737bn last year to $647bn. Riyadh has also slashed public spending this year by $80bn, senior officials say, with an array of austerity measures brought in to install greater fiscal discipline this year and next in departments that have become accustomed to spending. The effect is starting to be keenly felt in finance and the state-dependent private sector.
Abraham says there is a “consensus” that 2016 will be challenging, but notes that financings have held up better than expected this year, making matters “very hard to forecast in this current environment”.
As the liquidity squeeze sets in, bankers are raising concerns about the quality of the loans made during the past few years, whether to state supported enterprises or small- and medium-sized businesses.
Mustafa Abdel-Wadood, partner at emerging markets private equity firm Abraaj Group, says the market for transactions in the Gulf, along with other growth markets, has also been muted this year.
Companies involved in oil and gas, or construction companies dependent on state spending, have been slow to acknowledge the new market’s lower pricing for their assets, leading to a stand-off with prospective buyers that are seeking lower valuations because of the oil slump.
But Abdel-Wadood says some sectors remain interesting for private equity investors, such as healthcare and innovative sectors.
The Dubai-based company, which manages $9bn worth of assets, this year sold its 49 per cent stake in payments processor Network International to Warburg Pincus and General Atlantic. In November, it also participated in the latest $60m funding round launched by Careem, a Dubai-based competitor to taxi-hailing app Uber, as it seeks to expand beyond its operations in 20 cities from Morocco to Pakistan.
Abdel-Wadood said investing in infrastructure through cyclical downturns would serve the region’s best interests. Dubai, for example, continued delivering infrastructure through its recessionary year of 2009, allowing the indebted emirate to bounce back in 2012 and 2013.
“Had Dubai halted building, the city would have seen slower growth when the cycle turned around,” he said. “So the focus has to be on getting key infrastructure built.”
Petrochemicals company Borouge is pressing ahead with investment plans while being more conservative in general expenditure given tougher market conditions. “We are trying to manage costs carefully, but we won’t take short term decisions that damage long term plans,” said Wim Roels, chief executive of Borouge, a joint venture between Abu Dhabi’s state oil company and Austria’s Borealis, which is also majority owned by the oil-rich emirate’s investment company. “We are not laying people off. We are just spending money wisely and being conservative in spending, but not going to jeopardise [the future],” he said.
All the Gulf states have ambitious development plans, from Qatar’s football stadiums to Dubai’s $32bn new airport to service its hosting of the World Expo in 2020.
Funding these grand schemes, while vital for longer term economic health, could prove more challenging the longer the oil slump continues.
“Government-related enterprises (GREs) may see borrowing costs rise and there must be a possibility that the increase in sovereign borrowing in some Gulf countries removes some liquidity that would otherwise find its way to the GREs,” said Abraham. “However, the challenges for GREs are much less than those facing companies in the SME sector.”
Indeed, the small companies that are the lifeblood of employment are already feeling the economic slowdown — the region’s non-oil GDP is set to halve from 5 per cent this year to 2.9 per cent next year.
Lenders are tightening terms on SMEs, putting some firms at risk of default. In the UAE alone, up to $2bn of SME loans are now classified as at risk of default. “The oil price is affecting everyone — major projects are being scaled down or put on hold, this impacts both bigger and smaller contractors, who are all cogs in the economy,” said one auditor in Dubai. “They are all feeling the slack in the market.”