US dollar to lose lead in Asia project loans

SINGAPORE: Project financing in Asia priced in regional currencies is expected to double this year as banks veer away from assets backed by the US dollar, the head of regional project finance for Standard Chartered Bank said yesterday.

Conor McCoole told Reuters in an interview that project finance was growing strongly in Asia – lending hit a record US$44.8bil last year and in the first quarter of 2008 grew six-fold over a year earlier – despite the global credit crisis.

McCoole said he expected Singapore and Philippine power projects to dominate the market this year and for local banks to benefit longer term as regional currencies were used more in project financing.

But one casualty of the credit crisis in Asia's project finance market was lending in the US dollar, another indication of the stresses on the world's reserve currency. Most Asian currencies have rallied against the dollar this year, some to decade highs.

“There is no question that there are lot of Asian banks that are concerned about taking on US dollar assets and their ability to fund those assets. We are talking about very long term loan assets,” he said.

McCoole said he expected 40% of the region's project financing this year to be priced in local currencies, versus an estimated 20% last year.

He said that over the long term – five to 10 years – he expected 80% of project finance in Asia to be priced in local currencies, putting local banks in an advantageous position against foreign banks that rely on cross-border deals.

The dollar has fallen to record lows this year against the euro and the Swiss franc, plus a basket of major currencies.

In Asia, the Japanese yen has gained 7.5% this year and the Singapore dollar has strengthened by 6.4% to a record high. Several other Asian currencies, including the Thai baht, Malaysia's ringgit and China's yuan, have hit decade highs.

“We are seeing, at an early stage, a preference for much greater liquidity in local currency markets and we expect that to feed through into more local currency financing,” McCoole said.

He said Asian markets such as South Korea, Singapore, China, Malaysia and Thailand were already witnessing big local currency deals in the project finance market, a trend likely to spread to other parts of Asia.

In the first quarter of this year, banks have provided US$23.3bil in project financing, a six-fold increase over year-earlier levels, the data show. – Reuters