Project finance offers hope amid tougher 2016 for UAE banks

Amid the strain that UAE banks are likely to face this year as the price of oil falls to its lowest level in more than 13 years, project finance may be one of the brighter spots for lenders.

Despite the massive oil decline, governments in the Emirates are still committed to spending on infrastructure projects as populations keep growing and ahead of Expo 2020 in Dubai, bankers say.

“This is a very bright spot,” said Kumar Mahapatra, head of corporate finance at Dubai-based Commercial Bank International.

“I think it’s very important that governments keep announcing projects, especially such projects which are critical to the economy. It will help economic activity.”

In its 2016 budget announced in December, Dubai set aside Dh16.6 billion for infrastructure, transport and economics – a rise of Dh1.8bn from the previous year – as the emirate prepares to host Expo 2020. Dubai said after winning the right to host in 2013 that it would earmark more than US$7bn for infrastructure projects.

On Thursday, Bloomberg News reported, citing people familiar with the matter, that Dubai’s Road and Transport Authority is seeking more than $2bn to finance a 15-kilometre extension of its above-ground metro train line to the World Expo site near Jebel Ali.

Demand for debt like the RTA’s will be much welcomed by banks, which appear set for a tough 2016 as the economy slows. Lending is becoming slower as banks become more particular about would-be borrowers following a spate of high-profile defaults by small businesses, such as the retailer Atlas Jewellery.

Growth is forecast by economists to have slowed to 3 per cent in 2015 from more than 4 per cent in 2014. Consequently, banks have also been shedding jobs as they keep costs at bay, and analysts expect more cost-cutting this year. FGB, one the country’s biggest banks by assets, axed about 100 jobs in November in one of the more high-profile mass layoffs.

“I think given what happened in the last quarter of last year, where banks have slowed their credit a little bit, and this year has kind of started with lending being a little low. But everyone is smart enough to know that lending has to happen for economic activity to happen,” Mr Mahapatra said.

“I think that lending would normally increase again this year in corporate lending. The only sector which it might see a slowdown in SME sector, which was the largest hit last year.”

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