In the Era of Cheap Oil, Gulf Producers Are Forced to Borrow
Bankers say there has been a surge of interest in pre-export finance deals with the fall in the price of crude oil
Some Middle Eastern oil producers are considering taking money upfront against future production, as the fall in the price of crude pushes them to look at new ways to plug budget holes.
In this type of pre-export finance, companies or countries pledge revenues from future sales to banks and trade houses that lend money to them.
Oman recently closed its first crude-export finance, in which banks paid the country $4 billion in exchange for revenues from future oil production over five years, according to bankers familiar with the matter.
Last month the Abu Dhabi National Oil Co., or Adnoc, said it had signed a pre-export financing deal for the supply of liquefied petroleum gas over the next 10 years. And the world’s top exporter of oil, Saudi Arabia, also is considering such finance, bankers said.
Middle Eastern governments have spent extravagantly for years as the high price of oil filled coffers. But after almost three years of a weaker price, regional governments now need to borrow.
Bankers say there has been an increase in interest for such export finance.
“Ten to 15 years ago, you didn’t see Middle Eastern producers coming into the structured trade commodities finance market to raise financing, but now they are,” said Irfan Afzal, a director of syndication and agency at African Export-Import Bank.
Representatives from Oman and Saudi Arabia didn’t immediately respond to requests for comment.
Such deals, particularly a potential Saudi Arabian deal, could be large.
“If they go ahead, it would have to be big if it was to be meaningful for the budget,” said Kris Van Broekhoven, head of commodity trade finance at Citibank. Still, some countries may be reluctant to use this type of finance because it entails handing over future royalties from a national resource.
“It’s the crown jewels of the country, and you don’t pledge your crown jewels as a matter of principle,” Mr. Van Broekhoven said.
Since 1992, Ghana has borrowed hundreds of millions of dollars in pre-export financing from banks each year so it can buy the local cocoa crop from farmers. Angola’s state-owned oil producer Sonangol also has used pre-export finance.
But for oil-rich Middle Eastern nations, it is a novel tactic. Oil producers in the region so far have mostly used public bond markets.
Last year, after oil prices fell below $30 a barrel, the governments of Saudi Arabia, Qatar, Abu Dhabi, Bahrain and Oman raised around $39 billion on international bond markets, up from around $2.5 billion in 2015, according to Moody’s Investors Service.
The 2016 sum included $17.5 billion in bonds that Saudi Arabia sold last October, the largest-ever emerging-market debt issue. Kuwait has launched its debut international bond sale earlier this month to raise $8 billion.
Pre-export finance is one way oil producers can diversify their funding.
Such deals tend to be cheaper than an unsecured bond, bankers say. That is because banks can typically take comfort in a producer’s record of exporting fuel, they say. The risk to the borrower is that if the price of oil falls dramatically, they may have to either extend the repayment term or pump more oil.
“The Middle Eastern producers have relatively low political risk…banks would rather finance Qatar, Oman or Saudi then they would Venezuela or indeed some of the emerging countries in Africa,” said Mr. Afzal from the African Export-Import Bank.
Rating company Moody’s expects the six Gulf Cooperation Council countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—to raise almost as much again this year, after their combined balance sheet for 2015-2016 swung to a deficit equivalent to 9% of combined gross domestic product, compared with a combined surplus of around 5% of their GDP in 2014 when oil traded above $100 a barrel.
But that may not be enough. Saudi Arabia’s $17.5 billion bond covered only 22% of its 2016 fiscal deficit.
Moody’s estimates that oil accounts for around 25% of GDP in Gulf Cooperation Council countries, and around two-thirds of government revenue.
“If oil prices were to fall back to $40, we would see much larger deficits to finance,” said Mathias Angonin, analyst at Moody’s.
On Friday the price of Brent, the international benchmark, was at $50.80 a barrel, while West Texas Intermediate, its U.S. equivalent, was trading at $47.97.