Identifier
Created
Classification
Origin
08ABUDHABI1221
2008-10-22 14:16:00
SECRET
Embassy Abu Dhabi
Cable title:  

UAE'S RESPONSE TO FINANCIAL CRISIS

Tags:  EFIN ECON EINV PGOV AE 
pdf how-to read a cable
VZCZCXRO1516
OO RUEHDE RUEHDIR
DE RUEHAD #1221/01 2961416
ZNY SSSSS ZZH
O 221416Z OCT 08
FM AMEMBASSY ABU DHABI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1650
INFO RUEHDE/AMCONSUL DUBAI PRIORITY 8003
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
S E C R E T SECTION 01 OF 02 ABU DHABI 001221 

SIPDIS

DEPARTMENT FOR NEA/FO, NEA/ARP (BMASILKO) AND EEB
STATE PLEASE PASS USTR (BUNTIN)

E.O. 12958: DECL: 10/21/2018
TAGS: EFIN ECON EINV PGOV AE
SUBJECT: UAE'S RESPONSE TO FINANCIAL CRISIS

REFS: A) ABU DHABI 1141
B) ABU DHABI 1079

ABU DHABI 00001221 001.2 OF 002


Classified by Ambassador Richard G. Olson for reasons 1.4 (b,d).

S E C R E T SECTION 01 OF 02 ABU DHABI 001221

SIPDIS

DEPARTMENT FOR NEA/FO, NEA/ARP (BMASILKO) AND EEB
STATE PLEASE PASS USTR (BUNTIN)

E.O. 12958: DECL: 10/21/2018
TAGS: EFIN ECON EINV PGOV AE
SUBJECT: UAE'S RESPONSE TO FINANCIAL CRISIS

REFS: A) ABU DHABI 1141
B) ABU DHABI 1079

ABU DHABI 00001221 001.2 OF 002


Classified by Ambassador Richard G. Olson for reasons 1.4 (b,d).


1. (C) Summary. Like the US and Europe, the UAEG has taken a number
of steps to stave off the worst of the global financial crisis
impact. While the initial steps may have been poorly coordinated,
the full court press that began October 12 seems to have had the
desired impact. Investors and depositors seem to have regained
confidence, and indications suggest that what was predicted to be a
bust may simply bring a much-needed respite in inflation. End
Summary.

--------------
GOVERNMENT EFFORTS
--------------


2. (SBU) While initially many in the UAE were quick to argue the
global economic crises would not affect the local market, by
mid-September it was clear that the impact was significant. The
international uncertainty, a jittery local market and rumors of
Dubai's pending bust (septel) led the government to ramp up its
efforts to shore up investor confidence. Rumors swirled about the
financial difficulties at Abu Dhabi Commercial Bank and First Gulf
Bank. According to a senior Abu Dhabi finance official, the National
Bank of Abu Dhabi saw a rush of deposits from its smaller weaker
rivals. On September 17, the Ministry of Economy argued that the
economy was immune to the global crisis. Yet, on September 22 the
Central Bank announced it would inject AED 50 billion (USD 14
billion) into local banks in an effort to reduce interbank lending
rates.


3. (S/NF) This initial announcement did little to calm investors, and
local markets continue to decline (Ref A). Many speculated that
Dubai was on the verge of bankruptcy and wondered about the health of
domestic banks and real estate companies. On October 8, the Central
Bank cut its bank lending rate from five to three percent and the CD
REPO rate from 2.0 to 1.5 percent. On October 13, Central Bank
Governor Sultan bin Nasser al Sowaidi made a public statement that

"national and foreign banks in the UAE enjoy a strong financial
position." On October 14, Prime Minister and Ruler of Dubai Sheikh
Mohammed bin Rashid Al Maktoum (MbR) ordered the transfer of $19
billion to the Ministry of Finance to inject liquidity into the
banking sector. MbR also convened an extraordinary Cabinet session
announcing the government would insure all local bank deposits. The
next day officials clarified that only banks with "significant"
operations would be guaranteed; a clarification that effectively
excluded Iranian banks operating in the UAE.

--------------
MARKETS RESPOND
--------------


4. (C) The ramped up response seems to have calmed UAE markets.
Although one senior Abu Dhabi Investment Authority (ADIA) official
told the Ambassador the government was under pressure to "do
something" about the stock market declines, the banking
announcements, along with rebounding in US and EU markets, seem to
have restored investor confidence. Stocks have seen significant
gains following the announcements, with the Abu Dhabi Stock Exchange
gaining almost 9 percent in the past week.

--------------
BUT UNCERTAINTY LINGERS
--------------


5. (C) Although the extent of local banks exposure to the sub-prime
crisis and the ultimate impact of tight international liquidity on
other financial sectors is unclear, dismal news is expected. A
Security and Commodities Authority advisor told EconOff on October 22
that some banks' liability to asset ratios may approach 150%.
Smaller and weaker financial and real estate entities may be forced
to merge. In early October, Islamic real estate firms Amlak and
Tamweel announced their merger; both of the firms were described as
"bankrupt" by a senior Abu Dhabi finance official. Shuaa Capital, a
Dubai-based Gulf investment company, reported October 20 that it lost
almost $100 million in the third half of 2008.


6. (C) Given the uncertainty, the UAEG continues its efforts to
strengthen the economy. On October 21, the Cabinet convened an
extraordinary session to approve the 2009 budget. The surprise
announcement of the budget, which usually is approved in December,
combined with a 22 percent increase in expenditures, sends a strong
signal that the government is ready and able to stave off a downturn.
The first $5-6 billion tranche of the Central Bank liquidity
injection is expected October 23. The argument that slower growth
(to the tune of 5-6 percent) and lower returns may be good for the

ABU DHABI 00001221 002.2 OF 002


economy in the short term is beginning to gain popularity. The
result could be a much-needed respite in inflation and a necessary
consolidation in the banking and real estate sectors.


7. (C) Comment. Although the government's response initially
appeared uncoordinated and insufficient, financial officials are now
predicting a managed slow down. The positive response of the market
suggests the official plan may work. However, the uncertainty has
the country awash in rumors about the impact on Dubai and Abu Dhabi's
future (septel). End Comment.
OLSON