SCENESETTER FOR THE VISIT OF USTR SCHWAB TO THE UAE

UNCLAS SECTION 01 OF 02 ABU DHABI 001173

SENSITIVE
SIPDIS

FOR USTR AMBASSADOR SCHWAB FROM AMBASSADOR OLSON
STATE FOR NEA/ARP (BMASILKO)
STATE PLEASE PASS USTR (MOWREY, BUNTIN)

E.O. 12958: N/A
TAGS: ETRD EFIN ECON PGOV AE
SUBJECT: SCENESETTER FOR THE VISIT OF USTR SCHWAB TO THE UAE

ABU DHABI 00001173 001.2 OF 002



1. (SBU) On behalf of the US Mission, I warmly welcome your October
21-24 visit to the United Arab Emirates. Public and private sector
officials look forward to the opportunity to discuss bilateral trade
and investment issues, particularly at this sensitive time for the
world economy.

--------------
TODAY'S UAE ECONOMY - TOO BIG TO FAIL
--------------


2. (SBU) Despite its resource wealth and exponential growth, the UAE
has not been immune to the international economic downturn. Stocks
have been battered, liquidity is tight and consumer confidence has
declined. This month, the UAEG took a number of steps to restore
confidence: insuring bank deposits, creating a bank liquidity fund,
and reassuring the public that the government was ready and willing
to support the economy. Despite these steps, investors remain
concerned about local market conditions, particularly Dubai's
financial situation and the possibility of a sharp correction in
Dubai's large, overheated real estate sector.

--------------
ABU DHABI BOOMS
--------------


3. (SBU) There is much to suggest that the UAE will escape the worst
of the international downturn, and that Abu Dhabi will fare the best
of the UAE's seven emirates. With Abu Dhabi emirate controlling all
hydrocarbon resources in its territory (93 percent of the UAE's
oil),high, or at least relatively high, oil prices and a large
budget surplus will keep many optimistic in Abu Dhabi. A new
generation of officials has shepherded in an era of development,
with the related bevy of high-cost and high-profile investments and
megaprojects. While Abu Dhabi has undoubtedly lost billions in
recent weeks, the world economic downturn has yet to slow the rapid
pace of development, including the October establishment of a media
park (including partnerships with CNN and National Geographic),the
awarding of a billion dollar nuclear power contract to CH2MHILL, and
an expanded partnership with Advanced Micro Devices (valued at
almost $3 billion). The highest profile investments continue to be
driven by wholly or partly state-owned entities, with the weaker
private sector largely benefiting from the government's largesse.

--------------
DUBAI BRACES FOR IMPACT
--------------


4. (SBU) Dubai is less insulated from the global financial shock, as
much of its economy is dependent on trade, foreign tourism and
property investment, all of which are already contracting to some
degree. Many of the big real estate projects are believed to be
highly leveraged and have attracted a lot of short-term speculators.
There will certainly be needed rationalization in the overheated
real estate market, with unsustainable price growth rates (47% in
the first 6 months of 2008 for new property) dropping significantly
and speculators leaving the market. Many believe a number of the
weaker developers (particularly those without solid ties to banks or
government development schemes) and their projects are likely to
fail. Nonetheless, as in Abu Dhabi, most of the highest profile
projects are backed by government-affiliated companies and are
likely to go forward, if perhaps in scaled-back form. Dubai
continues to benefit from the region's most transparent and
business-friendly regulatory environment, its highly developed free
zones, and its region-leading port and airport. It also continues
to profit from its historical trade relations with Iran -- although
those particular ties are attracting increasingly negative
international attention. While it is unlikely the Dubai experiment
will fail, the impact of the tight international credit situation
and the unfolding of several significant financial scandals in the
emirate are injecting a sobering reality into the Emirate's grand
plans.

--------------
TRADE AND INVESTMENT STILL KINGS
--------------


5. (SBU) Most here remain optimistic about the UAE's economic
future, as well as the strength of the US economy. Public and
private sector officials will want to discuss how to promote
bilateral trade and investment. While few may admit it, negative
press from the failed DP World ports deal continues to impact public
views on the dependability of the United States as an economic
partner, particularly with regard to high profile issues like a Free
Trade Agreement. But however cautious and low-profile UAEG
officials may wish to be as a result, they still view the United
States as a fundamental component of their growth strategy.
Officials will be interested in how the TIFA Plus framework can be

ABU DHABI 00001173 002.2 OF 002


reinvigorated to advance US-UAE economic ties.

--------------
BILATERAL TIES REMAIN STRONG
--------------


6. (SBU) Our relations with the UAE remain broad, deep and enduring.
The UAE is a key partner, intent on cooperating with us to create a
stable economic, political, and security environment in a troubled
region. Concerned about regional proliferation, the UAE has been
responsive on export control issues. Abu Dhabi Crown Prince
Mohammed bin Zayed recently visited Iraq to reinforce UAE support
for the Iraqi government; in July, the UAE forgave Iraqi debt and
named an ambassador to Baghdad. The UAE will co-host the BMENA
Forum for the Future on October 18-19. Your visit will be taken as
another sign of our shared commitment to deepening all aspects of
the relationship.
OLSON