Project Finance in the Middle East - A regional overview

An overview of the trends, challenges​ and legal and regulatory changes in the Middle East.

Reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through - Dominance 2018 (Published: April 2018). For further information please visit www.gettingthedealthrough.com.

What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?

Ahmed Butt: One of the main trends over the last year continues to be the focus on oil prices. Considering the significant pressure placed on the major oil producers in the region in previous years (with Iran, Iraq, Kuwait, Saudi Arabia and the UAE reportedly all running a fiscal deficit in 2016) 2017 was hoped to be a turning point. Unfortunately, while 2017 saw an improvement in both the average oil price and the fiscal deficits, neither were as substantial as some initially envisaged.

Knock-on effects continued to be seen in the local project finance market, including the general tightening in local liquidity, with the Saudi Arabian banking sector being particularly affected. The trend began in 2015, continuing into 2016 and while the liquidity conditions improved in 2017, profitability reportedly declined, reflecting the rising impairment charges and funding costs.

Interest rates again continued to rise through 2017. For example, the overnight Emirates Interbank Lending Rate (EIBOR) rose from an average of 0.218 in January 2016 to 0.509 in January 2017, reaching 1.17 in January 2018. In Saudi Arabia, the three month Saudi Interbank Offered Rate (SIBOR) rose from 1.333 in December 2015 to 2.041 in December 2016 and dropping slightly to 1.87 in December 2017. This continues to translate into higher interest rates, shorter tenors and reduced debt-to-equity ratios on offer from lenders.

With market reports stating that project finance figures fell by three-quarters from 2016, the local project finance market remained relatively robust in 2017 for well-structured deals in traditional sectors such as energy.

Leonie Sellers: Renewable energy has continued to be a focus of the Gulf Cooperation Council (GCC). The UAE has previously targeted 44% of its power to be derived from renewables by 2050, and in September 2017 Dubai took landmark steps towards this by announcing plans to implement the world’s largest concentrated solar power project, which is set to generate 700MW of power when completed. With Saudi Arabia’s National Renewable Energy Program committing to generating 9.5GW of renewable energy capacity by 2023, Saudi Arabia has also looked to a future of clean energy and 2017 saw the initiation of the country’s first solar power project, with financial close expected shortly.

Saudi Arabia’s Vision 2030 and National Transformation Program continue to transition the Saudi economy away from overreliance on oil revenues and towards more private sector involvement. The highly anticipated initial public offering of shares in state-owned Saudi Aramco, expected for the second half of 2018, is a move that is likely to make the company the most valuable listed company in the world.

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