The volume of bank loans to the region, which includes the two biggest Arab economies of Saudi Arabia and the UAE, has dropped 65% so far in 2017 to $19.2bn, the lowest for the period in four years, according to data compiled by Bloomberg. In contrast, money raised on the international bond market has surged 46% to $42.7bn, a record for the period.
Governments and state-owned companies across the Gulf Cooperation Council are reining in spending after a halving of oil prices since June 2014 pushed state budgets into deficit. Belt tightening has driven total borrowing down almost a quarter this year, but more of the money raised is being packaged as bonds which often offer longer maturities than loans and allow access to a broader variety of investors.
“Given the macro picture, demand for investable capital is obviously not as buoyant,” Jamal al-Kishi, the Dubai-based chief executive officer for Deutsche Bank in the Middle East and Africa, said in an interview. Borrowers are realising the “benefits of issuing in the capital markets as opposed to going to banks” and the gap in terms of cost between syndicated-loan facilities and the capital markets has narrowed significantly, he said.
The value of contracts awarded for infrastructure and industrial projects in Saudi Arabia fell 29.3% in the first quarter from the preceding three months, Abu Dhabi Commercial Bank said in a report. Projects commissioned in the first quarter across the GCC, including in Qatar, Kuwait, Oman and Bahrain, fell 16% from a year earlier.
The “anaemic start” to syndicated loans this year is due to “continuing economic uncertainty plus the high volume of loan market activity we saw in 2016 and 2015,” Andy Cairns, the global head of corporate finance at First Abu Dhabi Bank, said by email. “There is little new money currently being sought and many refinancings have already been spoken for because borrowers took advantage of favourable loan market conditions over the past two years.”
The current trend of a greater reliance on the bond market than on syndicated loans for financing represents a positive rebalancing of the funding mix for corporates and quasi-sovereigns entities in the region, according to al-Kishi at Deutsche Bank.
“Commercial banks are not structurally well suited to warehouse long-term debt, it is the capital markets that should be engaged in that,” al-Kishi said. “As we move forward we will see further rebalancing toward the bond market, cannibalising in a healthy way the loan market” with both growing over time, as has happened in Europe and Asia, he said.