GCC governments in particular are embarking on pharaonic projects and are the force driving the region’s bond market. Saudi Arabia has pledged to spend more than $500bn by 2020 to modernise the kingdom, with investments in energy, transport, ports, logistics, education and the creation of six new cities from scratch. In Qatar, the world’s richest country in terms of GDP per capita, $100bn will be spend on infrastructure ahead of the Football World Cup the country will host in 2022, with plans for the implementation of real estate and leisure projects on a huge scale.
A joint study between RBS and the Cambridge Judge Business School released in September 2011 entitled ‘The Roots of Growth’ estimated the total infrastructure investment across the Middle East to 2030 will reach $236bn, up from $171bn in the previous two decades. Such enormous undertakings by governments in the region require liquidity through financing, and authorities and companies have resorted to selling debt to raise the money they need.
Banks were normally the institutions governments or companies would turn to when financing large-scale infrastructure or industrial projects, such as energy plants or new toll roads. However, the global credit crunch and the ensuing downturn have forced commercial banks to relinquish the project finance market: they simply could not afford anymore to lend the huge sums required amid a shortage of liquidity.
Hence the resurrection of project bonds, which were particularly popular in the 1990s, to finance the development of infrastructures in emerging markets. Project bonds are an attractive way of filling the financing gap left by banks: unlike normal bonds, they are secured by the project assets’ and paid entirely from the project’s cash flow, rather than the assets or creditworthiness of the project’s sponsor.
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