Winning business in overseas markets: Middle East and North Africa
Good morning and good afternoon depending wherever you are in the world i'm very pleased to join you today to present the opportunities in the Middle East alongside my UK Export Finance colleagues Michelle Leong and David Moleshead. As her Majesty's trade commissioner for the Middle East, Afghanistan and Pakistan, It's my role to drive trade and investment between the UK and this dynamic region creating jobs and growth in the UK as well as driving prosperity in our home nations. International trade is vital to drive growth for the United Kingdom's economy. COVID 19 has shown us
the importance of keeping trade flowing and building diverse and robust supply chains. New free trade agreements are an important part of the long-term economic recovery providing new opportunities for businesses and entrepreneurs in every industry. We are also working to break down market access barriers in international markets for UK companies, but global economic growth is under pressure. Despite the IMF [International Monetary Fund] forecasting a less severe recession this month than it predicted in June, the global economy is still in deep recession and the risk of a worse outcome than in its new forecast is still sizable. Global growth is projected at minus 4.4% in 2020 and in the Middle East region real GDP is projected to fall by 4.1%. For Britain the latest forecasts now predict
that the UK economy will decline by 11.3% this year, the June forecast was 10.2%. This means that the support that DIT [Department for International Trade] gives to exporters is more important than ever. The region I cover as HM Trade Commissioner is diverse, with the wealthy oil export nations typically in the gulf, to frontier markets like Jordan, Lebanon, Iraq, Iran, Afghanistan and Pakistan. But due to the limited time today I will focus mostly on the markets of the gulf.
UK trade with the Middle East is significant, particularly trade with the gulf markets. Total trade in goods and services between the UK and GCC [Gulf Cooperation Council] was 40.9 billion at the end of Q2 this year. Outside of the European Union [EU] the gulf, taken as a block, is the UK's second largest export destination globally, behind the US and China only. Within the GCC the United Arab Emirates [UAE] is our largest trading partner accounting for 43% of all trade. Buyers in the region are willing to pay more for UK made products. In fact 48% of UAE respondents to a Barclays bank survey
on the perception of brand UK said they would pay more for goods made in the United Kingdom because they perceive the quality to be higher, to be more reliable, and internationally respected. And most importantly good value for money. However the impact of COVID and the resulting drop in oil prices will have lasting repercussions. Oil exporting countries were hit hardest by the double whammy of the pandemic and the resulting decline in oil demand and oil prices. Those countries which are also tourist destinations such as the UAE and Bahrain were further impacted by the drop in visitor numbers.
Countries are beginning to reopen, however, albeit somewhat cautiously. It's clear that the region's immediate response to the pandemic including lockdowns, increased focus on healthcare provision and PPE supply, massive testing programs, and fiscal stimulus packages have come at an economic price. This has meant that budgets across all markets have been cut and government focus turned towards the sectors of most importance in the wake of the pandemic. But there remain opportunities in the gulf despite COVID.
Sector opportunities are driven by gulf vision strategies. Priority sectors have shifted with COVID but what has not changed is the focus on technology to deliver their vision strategies. Priorities include education, healthcare and life sciences, smart cities including energy and infrastructure, food and drink including agri-tech to name but a few. In education ed-tech is key because of the increase in distance learning which is likely to be a remaining factor. Vision strategies include healthcare as a priority. [The] COVID pandemic has increased the urgency of this area. Energy and infrastructure and smart cities are also part of gulf vision strategies. These are front and center in Saudi
Arabia for example through its giga projects such as NEOM, Qiddiya, and the red sea development. In the UAE it has expo 2020 in Dubai and in Qatar it is the FIFA World Cup in 2022 where clean energy objectives meet smart city ambitions. COVID's impact on the oil price means that there is increasing pressure to diversify away from hydrocarbons. Solar PV is already picking up pace and the region already holds the record for the lowest solar PV cost in the world.
Food security has been an increasingly important sector in the gulf and there is increased focus on domestic capacity to grow food supplies. You are here because you are interested in winning business in the Middle East. My department within the Department for International Trade [DIT] have advisors in 12 markets across the Middle East plus our regional UK Export Finance team in Dubai. And your local Export Finance Managers in the UK are all here to help you do that. Thank you very much for listening to me this morning and I'll now hand over to my regional colleagues in UK Export Finance. Thank you very much.
Thank you Simon for your very insightful overview of the MEAP region. Good afternoon everyone. I am David Moleshead senior counsellor for UK Export Finance and together with my colleague Michelle Leong we are based in the region and are responsible for originating UK Export Finance transactions across the MEAP region which is the Middle East - less Egypt plus Afghanistan and Pakistan - but in fact most of our activities are focused on the GCC markets. Both Michelle and I are former bankers, as indeed is Simon the trade commissioner that you've just heard from. Between Michelle and myself we have lived and worked in the region for over 30 years
so we are accustomed to seeing changes in which is still a very fast growing region, offering a range of opportunities despite the impact of COVID and the dramatic fall in oil prices. Yes, there have been cutbacks in capital expenditure plans across the GCC, but by comparison to many other parts of the world these reduced plans are still very significant indeed. Where we are experiencing a change of approach is in the attitude of using UK Export Finance.
Certain sponsors have admitted to us that it had been an intention to fully fund multi-billion dollar projects with equity only. Now that they see interest rates at an all-time low they want to take advantage of this position from agencies such as UK Export Finance whilst at the same time squeezing the margins for the contracts awarded. My colleague Michelle will take you through some slides which will provide an overview of the project activity in the key markets, highlight the amount of market risk appetite that's available, and then give details of some of the projects that UKEF has supported in the recent past. Over to you Michelle.
Thank you David. The activities of the Middle East region can best be described by this slide which shows the value of contracts awarded to individual countries over the last five years and up to the first half of 2020. Over the last couple of years the majority of the contracts awarded and executed in the Middle East regions are related to or concentrated to the two largest economies in the UAE and the Kingdom of Saudi Arabia. UAE once had the highest value of contracts awarded but following the slowdown in the construction sector since last year, the collapse of oil price, the current impact of COVID, UAE - especially Dubai - is in consolidation phase now although we expect a pickup of sizeable activities in Abu Dhabi to spur the UAE economy moving forward. Interestingly there is a steady increase of contracts awarded in the Kingdom of Saudi Arabia and by first half of this year the Kingdom of Saudi Arabia has overtaken UAE and the rest of the countries in the Middle East.
Even in challenging times with various lockdown measures, projects continue to be awarded and executed such as the red sea and Qiddiya and we expect more to come to the market especially the PPP projects. We expect the pace of growth to increase given the Kingdom's ambitious vision 2030 and certainly UK Export Finance would very much like to be part of the Kingdom's growth engine. The next slide shows contracts awarded by sector. Despite the slowdown in the construction sector, the construction sector is still very much an important sector to the Middle East economy with the minimum UK content searching for and financing [Clean Growth] projects. Projects that have a positive impact to the environment such as those with low carbon emissions, energy efficient, pollution prevention and control etc. will be the forefront of UK Export Finance activities in 2020 and 2021. And henceforth,
construction on green buildings, clean energy such as renewables, wastewater treatment, clean transportation like taking diesel vehicles off the roads, and projects which reduce harmful emissions to the environment could potentially qualify for UK Export Finance clean growth direct lending support - provided there is a minimum UK content in these projects. In addition to these sectors the priority sectors for UK Export Finance would be healthcare and education where UK has a very strong and established supply chain and technology. Why technology? That's because UK is the third largest technology hub in the world after the US and China. Both of these countries
have large domestic consumption and hence they are self-sustainable within their markets - compared with UK which has a smaller domestic market and very different demographic. Hence UK technology companies have to export. If you look at the Middle East region up to 60% to 70% of its population are below the age of 35, who are keen to adopt new technology; and also the region is looking to build smart cities and this is where we believe the UK could play a role.
This slide shows that over the last two financial years from 2018 to March 2020. More than 60% of the transactions underwritten by UK Export Finance globally relates to new transactions in the Middle East. In such challenging times ECAs such as UK Export Finance have been tasked to step up our support to fill the liquidity gap in the market often vacated by the private financial institutions - which find it difficult to fund in particular long-term projects. As of September this year I'm pleased to announce that UK Export Finance has increased our market risk appetite in over 100 countries. This slide shows UK Export Finance market risk appetite for the GCC and non-GCC markets. As you can see, UK Export Finance has ample market risk appetite to finance commercially viable businesses in the GCC markets. Markets in GCC regions such as Dubai,
UAE, Abu Dhabi, Kingdom of Saudi Arabia, and Kuwait - our market risk appetite is in excess of £4billion each. For the non-GCC markets we are more active in Iraq and to a lesser extent in Jordan though we are starting to see a spur of activities from Pakistan. This slide shows some of the most recent notable projects financed by UK Export Finance in the Middle East. In the UAE we provided £220million worth of support to support the UK contractor Kier for the construction of the 17,000 seater state of the art Dubai Coca-Cola arena, where there were 167 UK supply chain contracts. The construction of the waste to energy company Bee'ah headquarters in Sharjah using recycled materials was financed by UK Export Finance. UK content amongst others covered the architectural fees by the late Zaha Hadid and the purchase of artificial intelligence from Johnson Controls.
All four phases of Dubai World Trade Center were financed by UK Export Finance. Construction of the fourth phase of Dubai World Trade Center was by the UAE Al Shafar Group ASGC. In Oman we supported IHG contracts for the construction of the three hospitals. In Bahrain we provided our direct landing facility to the UK company Bluewater Bio for their contract to upgrade the wastewater treatment plant in Tubli.
UK Export Finance has also provided cover and direct lending to finance power infrastructure projects in Iraq. That concludes my presentation, I'll now pass on to my colleague David. Thank you Michelle. I would now like to take you through some features which apply to financing projects in the GCC region. First of all the acceptability of UK Export Finance. As Michelle has shown UKEF has a good track record of providing UKEF support in the UAE, Oman, Qatar and Bahrain so it's well regarded and understood by buyers, borrowers, contractors, and banks. The Kingdom of Saudi Arabia is now getting engaged in using ECA finance as it wants to bring international - hopefully UK - expertise, and also because of the size of their plans, alongside additional sources of finance. Other sources of finance that should be noted: many of the GCC sovereigns have very good access to capital - firstly from their own reserves and sovereign wealth funds - which have historically benefited from oil revenues. Also from their reputation in the international capital
markets. Since COVID all the GCC countries except Kuwait have tapped into the capital markets. This has been more challenging for Oman and Bahrain but the Kingdom of Saudi Arabia, UAE, and Qatar have been able to raise debt issues which have been substantially oversubscribed. It was also interesting to see that they have obtained terms of 30, 40 and 50 years - unheard of previously in the capital markets in the Middle East. Also markets like Kingdom of Saudi Arabia banks are pretty liquid and with a bit of persuasion from above are able to offer long terms at attractive pricing. What prompts buyers to take UK export finance?
First of all the process of procurement and finance are not linked in quite the same way that we see in other markets. The procurement team will look at contracts from a technical and commercial basis and sometimes take into account the in-country value and take no heed of the financing potentially available alongside the UK source contract. It's only when the treasury team steps in - sometimes months later - after the contracts have been let, do they consider the financing retrospectively. This can be supported on a reimbursement basis by UK Export Finance but it has challenges because the values being sought then are usually in the hundreds of millions of dollars if not billions. The credit risk is not the problem, it is being able to undertake the necessary due diligence to put the facilities in place as quickly as the borrowers would like.
It is unlikely they will look at small values for UKEF financing on a standalone basis, and by this I mean below tens of millions. However these can be accommodated if they're included as part of a JV arrangement or as a dedicated subcontractor. Our preference is for the loans to take place before construction and or supplies are entered into and this allows exporters to benefit from certainty of payment during the contractual process. What are the recent trends?
Those buyers and sponsors that have access to the capital markets are very conscious of their ratings and the effects of any downwind movement impacting the cost of future funding. There are definite moves to take the projects off balance sheet, and PPPs are very much the order of the day. PPPs have been used very successfully in the oil and gas and the power sector where there is known demand, but some of the other sectors now being considered could be more challenging especially if governments are looking to reduce the level of support underpinning these projects. How does UKEF compare to other agencies? First of all we are seen to be more flexible than other agencies. UK Export Finance was one of the
first agencies to support an IPP project in the region, and as it happens I was involved in the arrangement of this in 1995 in Oman. We were the first ECA to undertake the first Islamic [capital] market transaction in the same deal which was to cover the delivery of Airbus A380s to Emirates. We were the first ECA to complete a transaction in Dubai after the previous financial crisis. The [fact that we require]
20% UK content [to be] eligible for UKEF support puts us well ahead of many other ECAs who require 50% and above national content. Of course, as you've heard before Michelle, the clean growth renewable energy direct lending facility - at very attractive fixed rates - is well regarded by sponsors. [Ineligible] ... [This] gives us confidence that this will give UK exporters an additional edge. Does the lead contractor need to be a UK company? Again this puts us ahead of other agencies who restrict their support to their own national champions. In the recent past
UKEF has supported contracts by companies such as GE, Siemens and Technique. These of course are not UK groups, but they either have the footprint or the ability to source UK content. We've gone even further, one of the most active users of UK financing is ASGC, a Dubai based contractor, who we have supported with transactions in Dubai and Angola. In summary, we're confident that you will be able to [rely on us] to support you in the immediate future.
There's a multitude of opportunities and high value projects, there are many credit worthy sponsors that we're happy to assume risk upon, and as you'll have seen earlier we have severe amounts of market risk appetite and some very good attractive products. We look forward to supporting you to win business in our markets. Thank you and we're now ready to answer any questions.