(S) UAEG FINANCIALLY OVEREXTENDED

S E C R E T SECTION 01 OF 02 ABU DHABI 000773

SIPDIS

NOFORN

STATE FOR NEA/ARP, NEA/RA, E, D, EB AND PMAT

E.O. 12958: DECL: 02/17/13
TAGS: EFIN MARR MOPS PGOV TC
SUBJECT: (S) UAEG FINANCIALLY OVEREXTENDED


1. (U) CLASSIFIED BY AMBASSADOR MARCELLE M. WAHBA
FOR REASONS 1.5 (B,D).

SUMMARY AND COMMENT
--------------


2. (S/NF) Senior UAEG officials have told the
Ambassador on several occasions recently that the
UAE is facing serious cash-flow problems. The
basic problem is that the UAE has traditionally
funded its fiscal deficits (which can be as much as
15 percent of GDP) out of income received from
large overseas investments. In some years (such as
1996) the return on those investments exceeded
income from oil. But with the UAE's overseas
investments realizing negative real returns
(authoritative sources say post-9/11 governmental
portfolio investment losses ran as high as 30-40
billion usd),the UAE is having to tighten its
belt. Unfortunately, controlling spending is
proving quite difficult. Expenditures,
particularly on social services (health,
education),is increasing as a function of a
growing population and higher citizen expectations.
At the same time, assistance commitments to worthy
causes (Pakistan, Jordan, Afghanistan, etc.)
continue to mount and senior shaykh spending on
prestige projects (Shaykh Sultan bin Zayid's Lulu
Island project, the new GCC conference and resort
center, etc.) are proving hard to switch off. We
have heard the same concerns regarding cash-flow
across all levels of UAE officialdom, leading us to
conclude that this is not just poor-mouthing in
advance of an expected U.S. request for financial
assistance in funding an Iraq contingency. Our
requests for future financial assistance from the
UAE will need to be both judiciously chosen as well
as particularly well-supported if we are to
overcome the leadership's prevailing budgetary
concerns. END SUMMARY AND COMMENT.


3. (S/NF) Beyond the representations by senior
officials such as de facto Foreign Minister Hamdan
bin Zayid, there are numerous other signs of a
fiscal crunch:

-- A senior expat banker says Abu Dhabi's subsidy
to Dubai has been delayed for several weeks because
of cash-flow problems;

-- The Finance Department Undersecretary with day-
to-day responsibility for budget issues says the
government is seeking to defer non-essential
projects because of its fiscal overhang;

-- Several senior UAE military personnel have told
U.S. contractors that money is exceptionally tight
right now and is expected to remain tight through
FY 2004;

-- The managing director of the Abu Dhabi
Investment Authority (ADIA -- the repository of the
bulk of the UAE's overseas governmental
investments) told us that his organization has had
to defer certain requests from the government for
cash because of an unwillingness to sell off
depressed equities.


4. (S/NF) ADIA and Abu Dhabi Finance Department
officials note that managing the expectations of
the leadership with regard to income and rates of
return has been difficult -- particularly after the
fantastic returns of the 1990s. The ADIA managing
director commented that a real return of 5-6
percent would be outstanding in the current
environment, vice returns in the 1990s of 15-20
percent per annum. One well-connected banker
stated that while the UAE still has significant
assets, the drop in portfolio value combined with
the cash-flow crunch because of reduced returns has
created a very real sense of anxiety on the part of
the UAE leadership -- particularly Abu Dhabi Crown
Prince Shaykh Khalifa bin Zayed, who controls the
purse strings and who is in any case not
particularly noted for his generosity. The UAEG,
like most investors, is feeling the pinch, and with
some observers predicting oil prices likely to drop
sharply once Iraq's production is fully restored,
the medium-term outlook for government finances
here is decidedly bearish.

WAHBA