Bank funding in the Middle East doesn't boil down to liquidity alone
The context of the Middle Eastern debt market, bank lending has been a dominant component. The debt issuances, to date have been dominated by the banks and the government related entities (GREs).
There has been very little sovereign issuance, the entry of corporates to the debt market is a relatively new trend.
“Historically the Gulf corporates have enjoyed abundance of bank liquidity and bank funding. Globally the trend is towards disintermediation and I think we will see a similar trend over here soon. At the moment the Gulf enjoys abundant liquidity. I think as the Basel III rules come into effect between now and 2018, there is going to be focus on the extent to which many corporates can access bank funding,” said Stuart Anderson, Managing Director and Regional Head Middle East of Standard& Poor’s.
Many central banks in the region have started telling banks under their supervision that they will prefer to see a lot of their unsecured term lending migrate to the debt/sukuk market. There is also growing regulatory pressure to discontinue evergreen short term lending that has been getting constantly rolled over.
Many banks in the GCC have abundant liquidity and they have made lending cheap because they need to acquire assets. But many of the leading banks are approaching their credit ceilings to a number of their corporate borrowers.
The syndicated market was stronger in the previous cycle. The reason why the regional syndicated market was able to absorb large quantities of funding demand was because a lot of regional risks were being passed on to European banks. Many European banks were regular participants in the regional syndicated markets as it was very attractive for them. This was the case in big bilateral loans too as some of the bigger banks were selling down the risks to European banks. It worked as a very efficient way of recycling regional banks’ credit capacity.
“Now that’s all gone, over time the regional banks were filling the gap, but that is reaching a saturation level. In Saudi Arabia most banks are close to reaching their lending limits to top 30 corporates. So there is limited capacity for lending. I think only debt market can take the pressure off the banks in such a scenario,” said Anderson.
For the companies themselves, many are upscaling the quality of corporate management. “We are seeing a process right across the regional markets that new chief financial officers coming aboard with more professional financial management. Historically many CFOs in the Gulf had been promoted form finance manager who are technically very competent but not necessarily very capable of taking a strategic view of the business and funding for growth and taking a balanced view of cost over a period,” he said.
The finance managers who were overly concerned about the short term funding costs have been largely dependent on short term uncommitted funding solutions. But during and the immediate period after the global financial crisis these companies realised that all bank lines are repayable on demand and in the overall funding structure it makes sense for companies to get longer term commitments. For example, a five year bond, the principal is payable at the end of five years. In the case of many bank loans the principal repayment is distributed over the course of the five years and there is annual bank review.
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