Gulf nations are experiencing an economic environment that is very different from that of recent years. Lower oil prices for a sustained period it seems are putting significant pressure on government budgets, and tightening regional banks’ liquidity. Yet, both governments and corporates continue to plough ahead with large-scale strategic projects, in sectors such as transportation, infrastructure or energy, in pursuit of social and economic diversification goals.

So — how can these large financing needs still be met efficiently in a deteriorating liquidity environment?

Export Credit Agency (ECA) backed financing is one solution in the new government and corporate financing toolkit — a solution that governments and corporates in the Gulf have already started to master, but that deserves much wider attention in current times. Export Credit Agencies are government-affiliated institutions in countries that have a significant manufacturing base, such as Germany, France, Korea, or the US. These ECAs support their domestic companies in their international export activities, for example producers of power generation facilities, oil and gas or telecoms equipment, railways, and so on. Essentially, they act as an insurer, covering, through a guarantee from their domestic governments, a large part of the risk that banks take by lending to the entities importing those capital goods.

The GCC has always been a very active region for imports of capital goods, in the absence of a sufficient industrial base in key development areas. However, the financing of these imports was not necessarily considered in combination with an ECA-financing package, perhaps due to unfamiliarity about how ECA works and its relevance.

Loan guarantees

Over the past year, however, ECA-backed financing has been gaining popularity. Indeed, in 2016, we expect to see double the number of transactions executed in both 2014 and in 2015 across the region. The Al Sufouh tram in Dubai, for example, received loan guarantees from ECAs in France and Belgium in support of construction contracts won by their domestic companies, while some of the large defence contracts in the region benefited from the cover of the ECAs of the importing countries. It is also important to note that this type of financing is not limited to government companies or projects. For example, Tahrir Petrochemicals Corporation, owned by private Egyptian firm Carbon Holdings Ltd, expects to receive ECA backing for the multibillion petrochemicals complex in Egypt’s new Suez Economic Development Zone.

So how does it work? The cost of ECA-backed financing combines the cost of the cover (i.e. insurance) from the ECA and the cost of a straight financing by the buyer. This is how it is all calculated: the rating is an average of the credit rating of the sovereign backing the Export Credit Agency (which, since major ECAs are from OECD nations, is usually quite high), and the credit rating of the borrower. This average, due to the strong rating of the sovereign, often more than offsets the cost of non-ECA-covered financing, which is based solely on the borrower’s rating. ECA backed financing tends to cover a wide spectrum of potential financing sizes between circa $50 million (Dh183.5 million) to several billion with the participation of one or multiple ECAs and banks. ECA financing can also be done in an Islamic format, a relevant structure for many borrowers in the Middle East region.

Specialist banks

A common misconception is that export credit agencies only work with their national banks — in other words, that only German banks can work with Hermes, the German ECA, American banks with the US EXIM Bank, and so on. But this is not the case. ECAs work with banks from all jurisdictions as long as the underlying transaction matches their criteria, in particular, the portion of domestic production of the particular goods to be imported. Some banks are recognised as specialists of ECA-backed financing, through their reach and knowledge of a wide variety of ECAs in the world.

As international banks are even more than before stepping in to support the GCC economies and their ongoing investment programmes, borrowers should take a serious look at the competitive cost of financing through ECAs versus other sources of funding. As long as they are importing a bulk of their equipment from a single country, and that country is a member of the OECD, or China and India, (countries with their own ECAs), they could qualify. Sovereigns or corporates with large international procurements in sectors such as infrastructure, energy, transportation, telecoms, and so on would be particularly well-placed to benefit from this option, which serves the buyers, protects the lender, and supports the economy of the equipment provider.

Easy credit era

In this new economic environment, banks and borrowers will have to show increased creativity and technical expertise, to deploy and select a variety of financing solutions. Gone is the era of “vanilla” answers and easy credit. Yet with well-understood tools, like ECA, the new environment can continue to be conducive for structural projects and large job-creating programmes. Governments will preserve their ability to source capital goods from a variety of exporting countries; and banks will learn to cooperate with governments, government related entities and large corporates in an ever more innovative way.

Richad Soundardjee, Chief Executive Officer Middle East, Societe Generale