OMAN WEATHERS GLOBAL FINANCIAL CRISIS

C O N F I D E N T I A L SECTION 01 OF 03 MUSCAT 000722

SIPDIS

STATE PASS TO DOC THOFFMAN AND USTR JBUNTIN

E.O. 12958: DECL: 10/14/2018
TAGS: PREL ECON EFIN ENRG MU
SUBJECT: OMAN WEATHERS GLOBAL FINANCIAL CRISIS

REF: A. MUSCAT 486

B. MUSCAT 466

Classified By: Ambassador Gary A. Grappo for Reasons 1.4 (b and d)

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SUMMARY
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1. (C) Despite public assurances from officials that Oman's
economy has not been affected by the global financial crisis,
the Sultanate's stock market dropped by almost 40% over the
last five months while its banking system, formerly flush
with cash, now suffers from a lack of liquidity. Local
business contacts have expressed concern over weakness in the
financial sector, as well as the potential negative impact on
the economy if a major business failure were to occur in
Dubai. The Omani press generally applauded the financial
rescue package adopted by the U.S. Congress, but the Grand
Mufti of Oman allegedly stated that the financial crisis
heralded the long-term decline of the U.S. and chided Muslim
leaders for pursuing Western capitalism rather than Islamic
principles. Even with much tighter credit, a sharp market
downturn and lower oil prices, Oman's economic growth should
continue thanks to government spending on big infrastructure
and development projects. End Summary.

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MARKET NOSE DIVE
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2. (U) The index for the Muscat Securities Market (MSM),
Oman's national corporate equities exchange, closed on
October 12 at 7,121.32 points, down more than 38% from its
monthly high average of 11,555 points in May 2008. On
October 7, the MSM fell by 561.25 points, losing almost 7.3%
of its value in a single day. Investors interviewed by
government-owned Arabic daily "Oman" decried their "huge"
losses and demanded that the government intervene to restore
confidence in the market. (Note: The MSM rebounded by 5.2%
on October 13 in line with other world equity markets. End
Note.)

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IN PUBLIC, ALL IS WELL ...
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3. (C) In response to the MSM's steep downturn and the
increasingly global nature of the current financial crisis,
Omani officials have repeatedly and predictably assured the
Omani public of the soundness of the country's financial
system, as well as the overall economic situation. On
September 29, the Executive President of the Central Bank of
Oman (CBO),Hamood Sangour al-Zadjali, told local media that
the U.S. financial crisis "has no effect at all on the
Sultanate's banking sector," and added that "the current
liquidity in banks is excellent and there is no need to pump
in cash."


4. (SBU) On October 6, Minister of National Economy Ahmad
bin Abdulnabi Macki stated publicly that the world credit
crisis would have no direct impact on the general performance
of Oman's economy. In a statement to the Oman News Agency
(ONA),Macki assured investors that the economic situation in
the Sultanate was "stable" and attributed the sharp decline
of the MSM to speculation and "jittery nerves" among
shareholders. Speaking from a meeting of Arab central bank
governors in Marrakech, Morocco, Zadjali asserted on October
8 that "the global financial crisis has not affected
fledgling economies or those in the process of moving to a
market economy."


5. (SBU) Even more recently, Maqbool bin Ali Sultan,
Minister of Commerce and Industry and Chairman of the Capital
Market Authority, told local press on October 13 that "there
is nothing to worry about due to the current global financial
crisis." He asserted that "the slump in the MSM indices is
not justified" and claimed that "the Sultanate's banks do not
have any problem of liquidity." Maqbool also hailed a
decline in the inflation rate and pledged that "government
spending on the present projects will continue and will not
be reduced in the backdrop of the oil prices slump."

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... BUT CONCERNS EXPRESSED IN PRIVATE
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6. (C) Despite the public assurances of Oman's top financial
officials, local business people, bankers and government

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contacts are concerned over weakness in the financial sector
and its potential to drag down the Sultanate's brisk economic
growth. (Note: The CBO's annual report for 2007 recorded GDP
growth at 12.9%. End Note.) Just four months ago, local
banks were flush with liquidity and a source of easy credit
thanks to high oil prices, which prompted the CBO to reduce
commercial banks' lending ratio and increase their minimum
reserve requirements (refs A, B). Now, however, in a rather
dramatic reversal, business leaders complain that the credit
spigots have been turned way down and that there is
insufficient liquidity in the banking sector.


7. (C) In a September 29 meeting, the Chief Operating
Officer of BankMuscat, Ahmed al-Abri, expressed deep concern
to Econoff about the lack of liquidity in Oman. (Note: The
Omani government holds a 25 percent stake in BankMuscat, the
largest financial services provider in the Sultanate.
Al-Abri has been with the bank for over 17 years and is
involved with all aspects of its operations. End Note.) He
partially blamed local financial instability on investors
who, fearing a domino effect from falling equity markets in
developed economies, immediately cashed in on profits made in
the Middle East or were forced to sell their appreciated
holdings in the region to de-leverage their investments in
U.S. stocks. In addition, al-Abri -- echoing the sentiments
of many local business contacts -- stated that some local
stocks were overvalued as a result of speculation, and that
it was only a matter of time before the "market corrected
itself."


8. (C) Al-Abri also shared his concern with how the CBO, in
an effort to tame Oman's annual inflation rate of nearly 14
percent, had increased banks' cash reserve requirements in
June to eight percent of total deposits. While acknowledging
that other countries have much higher reserve requirements,
al-Abri said that Oman's financial services market was much
smaller than these states and that local banks were not
accustomed to such a steep reserve requirement. As a result,
Omani banks are now restricted in their lending and are
having difficulty financing loans for expensive projects. He
noted that many of the large-scale real estate development
and industrial projects in Oman have been funded by financial
institutions and investors outside the Sultanate.

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WORRIES ABOUT DUBAI
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9. (C) A number of business contacts have expressed fears
over the negative spill-over effect that a bankruptcy or
failure of a large developer in the nearby emirate of Dubai
could have in Oman. As one businessman stated, "Everyone is
watching Dubai -- one big failure could trigger a panic."
Al-Abri, while optimistic about the future economic outlook
for Oman, said that he and others at BankMuscat were closely
watching to see if funding for projects in Dubai and
elsewhere in the Gulf is drying up. If so, he opined, Oman
would "surely be affected" and "additional measures" may be
needed to secure investment in the country. Already, some in
Oman are clamoring for government intervention. Comments on
a popular local internet forum called for Oman's State
General Reserve Fund -- the Sultanate's primary sovereign
wealth fund, which undoubtedly has taken a major hit in its
own investments abroad -- to pump money into the MSM to boost
the price of shares. There are also rumors that the
government is considering a "buy back" of MSM shares from
investors, which could be re-sold to the same investors once
the market recovers to a certain level -- an approach taken
by the government in the wake of the late-nineties MSM crash.


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WHO'S TO BLAME?
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10. (C) Somewhat surprisingly, local press editorials have
not attempted to lay blame for the global financial crisis,
and the ensuing drop of the MSM, on the U.S. (Note:
"Foreign speculators" are the primary scapegoats for the MSM
decline. End Note.) Neither has the government of Oman been
subject to criticism in Omani newspapers for the steep market
downturn. State-owned Arabic daily "Oman" lauded the U.S.
financial rescue plan in an October 4 editorial, calling it a
positive step in resolving the credit squeeze and a proper
exercise of the role of central monetary authorities. The
lead editorial in "Oman" on October 8 hailed the "successful"
financial and monetary policies adopted by the Sultanate,
which it claimed had shielded the country from the effects of
the world-wide crisis.

MUSCAT 00000722 003 OF 003




11. (SBU) At least one very prominent Omani, Grand Mufti
Sheikh Ahmed bin Hamad al-Khalili, however, has reportedly
taken considerable satisfaction in the U.S. financial crisis.
According to an Omani internet forum, the Grand Mufti gave a
lecture on October 9 in a town in northern Oman during which
he allegedly stated that the crisis showed that the U.S. was
on its way out as a global superpower, while he also blamed
some unnamed Arab rulers and their advisors for foolishly
following a Western capitalistic economic model. (Note: The
Grand Mufti's lecture was not broadcast and there is no
transcript of his remarks. Moreover, Islamic banking is not
permitted in Oman. End Note.) Adherence to Islamic
principles, al-Khalili reportedly said, was the correct
response to financial uncertainties.

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COMMENT
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12. (C) Oman's economic performance has slowed from "full
steam ahead" to "proceed with caution." With falling world
oil prices, investor skittishness, and increasingly tight
local credit, the heyday of easy loans and a continually
rising stock market is over. Still, as the government
continues to pump large amounts of money into new
infrastructure development projects and business ventures,
the Sultanate's strong GDP growth may continue, although
likely at a slower rate compared to recent years. Slower
growth and a drop in global commodity prices should also help
ease inflationary pressures, but inflation will remain a
concern as long as the government continues its spending
spree. End Comment.
GRAPPO