Slumping crude prices are forcing oil-producing countries of the Gulf Cooperation Council to finance projects with funding sources other than national treasuries and bank debt, including capital markets and private investment.
A report by Standard & Poor’s Ratings Services (S&P) estimates GCC governments need $604 billion to fund projects through 2019, including $100 billion on infrastructure. Planned capital spending is much lower: about $330 billion, with $50 billion for infrastructure.
Projects are transactions involving construction risk, including real estate, oil and gas, transport, and infrastructure.
Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar account for 92% of GCC capital spending through 2019, S&P estimates. Other GCC members are Bahrain and Oman.
Of the total value of projects planned and under way this year—about $140 billion—48% is for real estate and 17% each for oil and gas and infrastructure.
As project needs outstrip capital spending, S&P notes, deposits of regional banks are declining because of the oil price plunge. Governments therefore have turned to less-traditional sources of finance.
S&P, for example, expects public-private partnerships (PPPs), already used for power and water installations and gaining approval from governments, to spread into other project types.
“Given the gap between the Gulf’s huge infrastructure capital needs and the ability and willingness of sovereigns to continue to foot most of the bill, as well as their moves to develop PPPs in their countries, we believe that the private sector and the capital markets will be playing a larger role this year and [in] years to come,” the study says.
Liberalization of project finance in the GCC region coincides interestingly with initiatives in Saudi Arabia, Oman, Qatar, and Bahrain to end fuel and other subsidies.
While oil wealth was expanding, traditionalist cultures of the GCC region modernized selectively. Contraction won’t halt modernization. Rather, as the financial evolution described by S&P suggests, it will push the process into realms uncomfortable for some regimes while expanding roles for nonstate investors formerly held in check.
(From the subscription area of www.ogj.com, posted Feb. 12, 2016; author’s e-mail: [email protected])