UAEG WELCOMES CONTINUED DIALOGUE ON INVESTMENT

C O N F I D E N T I A L SECTION 01 OF 03 ABU DHABI 003709

SIPDIS

NOFORN
SIPDIS

NSC FOR MCCORMICK
DEPARTMENT FOR E, EB/IFD/OMA, NEA/ARP
TRREASURY FOR U/S ADAMS AND DAS SAEED

E.O. 12958: DECL: 09/20/2016
TAGS: EFIN EINV AE
SUBJECT: UAEG WELCOMES CONTINUED DIALOGUE ON INVESTMENT

REF: ABU DHABI 3685

Classified By: Ambassador Michele J. Sison for reasons 1.4 (b and d).

1.(C/NF) Summary: Assistant Secretary of State for Economic
and Business Affairs Daniel Sullivan and Treasury Deputy
Assistant Secretary for Middle East and Africa Ahmed Saeed on
September 11 met with government banking and business
officials in Abu Dhabi to discuss a broad range of issues
focusing on foreign investment in the US. The UAE Central
Bank Governor welcomed continued dialogue on investment,
current accounts, and monetary issues, including the GCC's
plan for a unified currency circa 2010. He believes the
technical hurdles will be surmounted for a 2010 transition,
but the political climate will determine if the timeline
slips. The CEO of Mubadala Investments said the most
important step the US can take is to continue and expand
dialogue between companies and investors in the US and UAE.
Abu Dhabi Investment Authority's (ADIA) Deputy Managing
Director said the UAE remains committed to the FTA and ADIA
is as willing to invest in the U.S. as it was before the
Dubai Ports World transaction. End Summary.

2.(U) Assistant Secretary of State for Economic and Business
Affairs Daniel Sullivan, Treasury Deputy Assistant Secretary
for Middle East and Africa Ahmed Saeed, Ambassador, Treasury
Economist Jonathan Rose, EconChief and Dubai PolEconoff
(notetaker) on September 11 met with government banking and
business officials in Abu Dhabi to discuss a broad range of
issues focusing on investment in the US and regional
economics.

Central Bank Welcomes Strategic Dialogue, Comments on Unified
GCC Currency
--------------

3.(SBU) DAS Saeed met with UAE Central Bank Governor Sultan
Nasser Al-Suwaidi, Deputy Governor Mohammed Ali Bin Zayed,
Assistant Executive Director and Head of the Anti-Money
Laundering and Suspicious Cases Unit (AMLSCU) Abdulrahim
al-Awadi, Executive Director of Supervision and Examination
Department Saeed al-Hamiz, International Director AMLSCU
Ahmed al-Qemzi and Bank Examiner Ibrahim al-Hosani. DAS
Saeed introduced three key issues the USG would like to
engage the UAE on: investment climate, current account
balances and exchange rate issues. DAS Saeed reassured
Al-Suwaidi the US remains committed to a transparent and open
climate for foreign investment, even after the Dubai Ports
World (DPW) transaction. Al-Suwaidi expressed thanks for the
President's strong support of the DPW transaction and
welcomed a continued strategic dialogue.

4.(C) DAS Saeed explained USG thinking on its current account
deficit and a three-pronged strategy for addressing it,
including increased USG savings (reducing the deficit),
growth in European markets and revaluing China's exchange
rate. DAS Saeed asked Al-Suwaidi for his thoughts on the
benefits of UAE exchange rate flexibility. Al-Suwaidi said
the stability offered by pegging the dirham to the dollar has
made long-term planning possible and is therefore quite
valuable. Al Suwaidi noted that if the UAE were to drop its
dollar peg, the options would be pegging to the Euro or
floating. DAS Saeed noted that a flexible exchange rate
would give the UAEG greater levers to manage its economy.
Al-Suwaidi responded that inflation has not been a major
problem in the UAE. He agreed there would be advantages on
the export side, but pointed out tourism and imports -- which
make up the bulk of the UAE economy not exports -- are top
priorities, so this change would have little practical
effect. Al-Suwaidi intimated the time is not right for the
UAE to move to a flexible exchange rate and that it is not
seriously considering moving to a Euro peg.

5.(C) Al-Suwaidi said 98 percent of the Central Bank's
reserves remain dollar-denominated and will remain so. In
response to a question from DAS Saeed, Al-Suwaidi said the
UAE has not established a position on IMF quota reform and
needs to coordinate with the Ministry of Economy which leads
that issue.

6.(C/NF) Al-Suwaidi said technical issues for the GCC move to
a single currency are on schedule for a circa 2010 launch,
but many political issues remain that could postpone
implementation significantly. He saw "three pillars" which
remain to be decided to establish the common currency:

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flexible or fixed exchange rate (to be discussed at the
December GCC Bank Governors meeting); currency printing and
distribution, including who benefits from the related
infrastructure; and the question of reserves put up front to
guarantee the currency. Al-Suwaidi believes the most
difficult issues are GCC states necessarily giving up some
sovereign rights.

7.(C) Al-Suwaidi listed several issues that complicate
actions by the UAEG, including the UAE's political structure
and popular Emirati sentiment. He said recent press about
Emirati students having visa problems in the US put pressure
on the administration. Al-Suwaidi also stressed the
importance of security cooperation -- if these Emiratis are
being turned away from the US because of security concerns,
the Central Bank should be told so that the UAEG can take
action against these threats.

Mubadala CEO Encourages Greater Dialogue
--------------

8.(SBU) A/S Sullivan, DAS Saeed and Ambassador met with
Mubadala CEO Khaldoon Al-Mubarak. Al-Mubarak also serves as
Chairman of the Executive Affairs Authority -- an independent
economic, social and political think tank of 15-20 people
that provides policy advice for the Crown Prince of Abu
Dhabi. Mubadala is completing a study on perceptions of the
UAE in the US, in an attempt to understand where the country
stands six months after DPW. Al-Mubarak believes Americans
have largely forgotten about DPW, but negative sentiment
overseas about the issue remains. A/S Sullivan stressed that
the administration and many American legislators remain fully
supportive of the UAE and continued Emirati investment in the
US. A/S Sullivan and DAS Saeed emphasized the importance of
foreign direct investment in the US job market, which can be
a powerful force in elections. Al-Mubarak said the most
important step the US can take is to continue and expand
dialogue between companies and investors.

9.(C) Al-Mubarak spoke about the purchase of a French
company, SR Technics, to illustrate his concerns about US
investments. He postponed closing the deal for three weeks
so the company could divest its interest in a US-based
aircraft maintenance and overhaul company. "Everyone"
encouraged Mubadala to cancel the deal if the US company were
part of it because of the political fallout risk. DAS Saeed
reinforced commitment from high level US officials saying "We
want you back." Al-Mubarak responded the UAE is as
interested as ever in investing in the US and the UAE
Ambassador to the United States has visited with more than 70
member of Congress in the last several months. A/S Sullivan
told Al-Mubarak US businesses in the UAE continue to prosper.
Al-Mubarak gave credit to the quality and experience of US
companies.

ADIA on FTA and Investment Strategies
--------------

10.(C/NF) A/S Sullivan and DAS Saeed spoke with Abu Dhabi
Investment Authority (ADIA) Department Managing Director
Khalifa Al-Kindi and Senior Fund Manager Hashim Kudsi, about
the FTA and ADIA's investment strategies. Al-Kindi clearly
did not want to discuss the FTA, claiming that ADIA does not
play a major role in FTA discussions. He believes labor
unions are a difficult obstacle but the UAEG intends to
complete the FTA. He stressed the positive movement UAEG has
already made on new labor laws and practices, but at this
time the UAEG is "not ready for the labor issue." (Comment:
Given the major role that ADIA officials have played in the
FTA negotiations, it is unclear why Al-Kindi downplayed their
role. We understand that there are some factional divisions
within ADIA. This meeting brought them into clear relief.
End Comment.)

11.(C) Al-Kindi provided a breakdown of ADIA's investment
strategy, without commenting on the size of its portfolio.
He noted that about 45% of ADIAs inflow of cash was invested
in equities (40% of that in US equities),15% in global
government bonds, 5% in corporate bonds, 3% in inflation
indexed bonds (60% of that in US TIPs) Real estate, hedge
funds (8%),and private equity (3%) make up smaller parts of
the portfolio. In addition, Al-Kindi stated that ADIA is 11%
in cash (or short term instruments such as 3 month t-bills),
which is historically high. He noted that returns on cash
like investments were good. (Comment: Al-Kindi's comments

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confirm what we have heard earlier from other ADIA officials,
who provided an additional perspective. They noted that ADIA
tends to keep its investments in companies under the various
reporting thresholds. So much cash has been flowing into
ADIA from the high oil revenues, it has had some difficulties
meeting this goal and staying consistent with its asset
allocation requirements.) Al-Kindi also said China only
permits ADIA 200 million dollars maximum investment in public
equities there. He believes this limit may be due to
UAE-Taiwan relations. Al-Kindi said ADIA has some 800
managers across the globe, focused on large-cap investments.
Due to the large amount of money ADIA handles, small- and
mid-cap investments are problematic and therefore avoided.
Additionally, ADIA eschews non-government and emerging market
debt markets.

12.(SBU) DAS Saeed emphasized the USG desire for ADIA to
continue investing in the US and offered to explain new
legislation and questions related to the CFIUS process, or
host ADIA officials in the US. Al-Kindi said ADIA is as
willing to invest in the US as it was before DPW. Al-Kindi
also complained bitterly about the complicated process for
getting US visas and recent press about UAE students in the
US.


13. (U) This cable has been cleared by A/S Sullivan and DAS
Saeed.
SISON