ADIA APPROVES SWF TRILATERAL GROUP; NO DECISION

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 001899 SIPDIS SIPDIS TREASURY FOR D/S KIMMITT, U/S MCCORMICK, A/S LOWERY, DAS SAEED, DAS BARTH, DAS SOBEL, RKAPROTH, CBERRY, JROSE, KMATHIASEN NSC FOR NRAMCHAND STATE FOR NEA/IR, NEA/ARP STATE FOR S/CT, EB/ESC/TFS, INL/C/CP E.O. 12958: DECL: 11/18/2017 TAGS: AE ECON SUBJECT: ADIA APPROVES SWF TRILATERAL GROUP; NO DECISION MADE ON DIRHAM VALUATION REF: ABU DHABI 01898 ABU DHABI 00001899 001.2 OF 002 Classified By: Ambassador Michele J. Sison, for reasons 1.4 b and d. ¶1. (C) Summary. Abu Dhabi Investment Authority (ADIA) Managing Director Sheikh Ahmed bin Zayed al Nahyan green lighted UAE's participation in a sovereign wealth fund (SWF) trilateral group proposed by Treasury U/S McCormick (ref). The proposed consultative group will include ADIA, the Government of Singapore Investment Corporation (GIC) and the U.S. Treasury Department. Sheikh Ahmed also stated the UAE was still reviewing its currency policy at the federal level, and that no final decision has been made regarding a possible revaluation or de-pegging from the dollar. Recommendations will be provided to UAE President Sheikh Khalifa for his final word. End Summary. SWF Trilateral Proposal -------------- ¶2. (C) On 18 November 2007, Ambassador and Treasury Attach met with ADIA MD Sheikh Ahmed and his Office Director Mohammed al Amri at Sheikh Ahmed's request. (Note. Sheikh Ahmed is the eleventh of UAE founding father Sheikh Zayed's 19 sons and a key player in UAE's financial structure. End Note.) Sheikh Ahmed stated that ADIA had reviewed the Treasury SWF proposal and would like to work together with the USG and GIC to begin reviewing an overall framework for SWF best practices guidelines. Sheikh Ahmed stressed that ultimately he would like to include other countries and funds in this process; however, he agreed to start the talks with USG, ADIA and GIC, bringing in the others later on for consensus. Sheikh Ahmed indicated that this decision was approved by UAE President Sheikh Khalifa and Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed. Sheikh Ahmed also inquired about GIC's response to the proposal. ¶3. (C) Sheikh Ahmed stated that he understood the concerns in U.S. and other SWF-recipient countries that are directed towards SWFs engaging in investment for political, rather than commercial, ends. He also acknowledged to his dismay that ADIA was often grouped together with these less reputable funds that are the true source of international concerns. Sheikh Ahmed affirmed ADIA's commitment to investing in the U.S., and added that guidelines would be helpful in allaying concerns about ADIA and communicating its positive qualities. ¶4. (C) Sheikh Ahmed advised that his Office Director Mohammed al Amri will serve as the point of contact for ADIA on this issue. (Note. While Mohammed al Amri is the undisputed gatekeeper and trusted confidant to Sheikh Ahmed, whose views are significant and insightful, he is not a substantive ADIA official with respect to financial decision making. End Note.) ¶5. (C) Background. On 11 November 2007, Treasury provided ADIA with a Concept Note for Advancing Work on Sovereign Wealth Funds, as promised during a 29 October meeting between U/S McCormick and Sheikh Ahmed (ref A). The Concept Note proposed a trilateral working group consisting of ADIA, GIC and the USG, led by Secretary Paulson, to develop a common understanding and shape public debate on SWFs. The Concept Note envisions monthly meetings beginning in mid-December 2007, culminating in a conference/seminar in Washington on the margins of the IMF and World Bank Spring meetings to share insights and suggestions from the trilateral group discussions. End Background. ¶6. (C) Comment. As recently as last week, ADIA insiders had told Ambassador and Econ Chief in informal conversations that Sheikh Ahmed reportedly remained ambivalent towards the proposal, questioning whether a formal response to the U.S. proposal was even necessary. Embassy Abu Dhabi assesses that U/S McCormick's 14 November testimony on SWF, with its positive statement on ADIA, had a material impact on ADIA's decision making, as well as encouragement from other federal and Emirate-level bodies. End Comment. Dirham - Dollar Peg -------------- ABU DHABI 00001899 002.2 OF 002 ¶7. (C) Sheikh Ahmed also raised the issue of the UAE dirham and its peg to the U.S. dollar. Sheikh Ahmed agreed with the Ambassador that "open communication" between the UAE and the U.S. regarding UAE plans and intentions was important, adding that a "well-studied" decision should be made. Sheikh Ahmed noted that the dirham had been pegged to the US dollar since the UAE became an independent nation, and that this policy has served the UAE well. Regarding the decision making process, Sheikh Ahmed stated that the federal cabinet had discussed the issue and requested that the Central Bank prepare a study on valuation and the peg. During this study -- which is still ongoing according the Sheikh Ahmed -- the Central Bank sought the input of ADIA and other UAE institutions. Once a consensus opinion has been reached, the options will be presented to UAE President Sheikh Khalifa for his ultimate decision. The deliberations will include consultations with the UAE cabinet and Supreme Council -- the rulers of the seven Emirates. (Note: On 16 November, a senior ADIA investment advisor told Econ Chief that he had been one of the people asked to provide input on the currency issue. He noted the problems attracting workers from countries whose currencies had appreciated against the dirham. "There are a million Indians" he noted, "we don't want them rioting." He downplayed the Governor's comments, noting that the Governor would not be the final decision maker. End Note.) ¶8. (C) Note. During a 13 November speech in Tokyo, UAE Central Bank Governor Sultan bin Suwaidi roiled regional currency markets when he stated that the dirham had "reached a crossroads now with a further deterioration in the U.S. dollar," causing an increase in speculation that a revaluation or de-pegging was in the offing. Suwaidi continued his statements to the press the following day in Seoul. Separately, during a visit with Ambassador Sison on 17 November, former Treasury Secretary Lawrence Summers stated that he was hearing from local funds and economists "less but sooner," implying that many expected a modest revaluation in the near term. End Note. ¶9. (C) Comment. Some regional experts have concluded that Governor Suwaidi now supports revaluation and possibly even moving to a basket of currencies, heavily weighted to the dollar. Seen in this light, Governor Suwaidi's recent press statements may reflect an attempt to create pressure within UAE and on Saudi Arabia to support these steps. Many financial commentators speculate that UAE will be reluctant to change its currency policy in the absence of similar steps by Saudi Arabia. End Comment. SISON