In times of tight liquidity, ECA is a solution
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.