JEDDAH PRIVATE SECTOR WEIGHS IN ON THE GLOBAL

UNCLAS SECTION 01 OF 02 JEDDAH 000497

SENSITIVE
SIPDIS

DEPT FOR EEB AND NEA/ARP; RIYADH PASS TO DHAHRAN

E.O. 12958: N/A
TAGS: ECON EFIN PREL
SUBJECT: JEDDAH PRIVATE SECTOR WEIGHS IN ON THE GLOBAL
FINANCIAL CRISIS

1.(U) Summary. In a roundtable discussion convened by
AmConsul Jeddah, a group of Jeddah economists, bankers, and
business executives expressed confidence in the short and
long term prospects for the local and national economy
despite the worsening international economic climate. While
acknowledging the overreaction by stock market investors to
external factors, the consensus of opinion was that the
policies of the Saudi Arabian Monetary Authority (SAMA)
combined with the naturally conservative principles of
Islamic banking, have afforded the Saudis a minimally
leveraged investment profile and thus sufficient reserves to
maintain reasonable, even if reduced, economic growth over
the next few years. Despite a general tenor of optimism,
particularly with regard to the local economy, most
participants assumed that the economic situation would
deteriorate worldwide for the next six months at least, some
estimating that outside Saudi Arabia a global recession will
continue until 2010 or 2011. End Summary.


2. (U) Participants in the roundtable included Perihan
Al-Husseini and Dr. Sami Suwailem, economists from the
National Commercial Bank (NCB),and the Islamic Development
Bank, respectively; Wadea Kabli, economics professor at King
AbdelAziz University; Ibrahim Foudah and Amr Khashoggi,
members of the local business community with wide-ranging
investment interests in the KSA and beyond; Hawazin Eshki, a
corporate relationship banker from the Saudi French Bank, and
Hasan Al-Jabri, Board Member, Managing Director and Head of
Investment Banking at NCB Capital. Two of the participants
were young women. All but one lived and studied in the U.S.


3. (U) Despite coming from a variety of institutions and
ranging in age from early twenties to mid-sixties, there was
no real point of controverSy or disagreement during the
course of the two-hour exchange. For example, regarding the
Saudi stock market which now stands at a five-year low,
several participants lamented the emotional reaction by
investors to falling markets elsewhere. Ms. Al-Husseini
noted that most investors in the Saudi market are individuals
rather than institutions and thus given to emotionally-driven
investment decisions. Several participants said that the
listed companies are all doing well, earning a profit, and
set to continue on the same course - though profits may be
lower than in past years. Still, as one participant noted,
"even if returns at listed companies fall to the 8 percent
range -- as compared with rates as high as 30 percent or more
in recent years, that would still be considered high by
historical and international standards." The group agreed
that investors were being foolish to sell-off their positions
given the positive fundamentals. One of the businessmen said
that more people should follow the example of Warren Buffet
and be greedy when others are fearful.


4. (SBU) One of the factors underlying the group's general
sense of satisfaction with the economy in both the Western
Region of Saudi Arabia and Kingdom-wide is the falling price
of raw materials and the resulting drop in construction
costs. The decline in the cost of housing was greeted as a
positive development given the shortage of affordable housing
units for middle and lower income families. Thus, even
though they acknowledged there had been some announcements of
slowdowns in public projects such as refineries and aluminum
smelters, they said that projects in the private sector are
all still moving forward. Foudah noted that a 2700 unit
residential construction project in which he is involved is
being recast from a luxury to a middle market project,
something that was not possible based on raw material prices
even two months ago. The price of steel has dropped 36%
since late June and the price of cement is also down. (Note:
Some participants felt that a Royal decree which prohibited
the exportation of cement in order to satisfy local demand
would have to be rescinded due to projected over-supply of
domestic production. They said this is in fact one reason
why additional aluminum smelters should not be built, one
being sufficient to meet domestic needs).



5. (U) Concerning leverage in the financial sector, Dr.
Suwailem said that SAMA policies combined with the principles
of Islamic banking had kept the disparity between money
supply (M2) and debt from reaching the historic spread seen
in the U.S. since the seventies. He argued that the spread in
the U.S. had led to the accumulation of debt at a faster rate
than the accumulation of wealth. This is not possible in
Islamic banking where banks are only permitted to invest in
the "real economy" and earn returns based on the
profitability of the project or business subject of the loan.
Investment in financial instruments such as credit default
swaps and mortgage-backed securities is not permitted at

JEDDAH 00000497 002 OF 002


Islamic banks. Suwailem noted the recent interest taken by
some in the UK, France and elsewhere in the West in applying
Islamic banking principles. In response to a question
regarding the recent trip by UK Prime Minister Gordon Brown
to the GCC in search of capital said that there is a greater
willingness in the region to lend to Western institutions
that apply Islamic banking principles. Suwailem commented
that all divine religions apply similar principles to the use
and lending of money including the practice of forbearance
and the prohibition of usury.


6. The participants had little to say about the G-20 Summit,
even when asked to comment on the role of Saudi Arabia.
However, when asked about a statement by Finance Minister
Ibrahim Al-Assaf on the sidelines of the Summit that the KSA
has no plan to make additional contributions to the IMF, all
agreed that that was the correct position in terms of their
national interest. They noted the pressing infrastructure
needs both locally and throughout the Kingdom - from fixing
potholes to building proper schools -- and said that the
local population asks why Saudi money should go to help
elsewhere when there is so much work to do here. They agreed
with FinMin Ibrahim that the KSA already does its part in
helping to boost or reduce oil production as required by the
rest of the world.


7. The price of oil was another subject on which the group
declined to speculate beyond noting that whatever happens
next year there is a 200 billion dollar surplus from the
elevated price of oil in 2008 which is available to keep
development projects on track. Given the private sector
orientation of everyone in the room, there was a certain
indifference to the price of oil as it might effect the
economy. They said that business people and investors had
made substantial profits in recent years and were deploying
them in the Kingdom and beyond, whether in the creation of
manufacturing operations or in real estate development
projects here and in the Gulf. Only Kabli, the oldest
participant, warned that there is no relationship between the
price of oil and supply and demand. He said that despite
aggressive reductions in output in the 80s, the price
plummeted and the KSA had no power to stop it, cautioning
that there is no reason this can't happen again.


8. Despite the intended focus of the discussion on Saudi
Arabia, the participants deviated more than once to speculate
about the challenges facing President-elect Obama. Their
remarks focused on the dilemma the new Administration will
face concerning tax policy and they also said the market is
waiting for action. One participant remarked that most
governments have lost credibility in handling their economies
during this crisis, and that the U.S. is now the champion of
economic mis-management. He noted that going forward it will
not be business as usual.


9. Comment. Most of the participants in the Roundtable are
new contacts for AmConsul Jeddah. Their views were not
generally known prior to the discussion. Nor, with few
exceptions, did they know or know of each other. The
consensus demonstrated over a range of issues was thus all
the more striking. Pol/EconOff invited the group to
reconvene following the Inauguration in the U.S. but before
the next meeting of the G-20 to take the measure of economic
conditions in Jeddah and beyond. End Comment.
TONEY