SAUDI BUSINESS LEADERS: WE'RE IN AN "L" CURVE

C O N F I D E N T I A L SECTION 01 OF 02 JEDDAH 000420 SIPDIS DEPT FOR NEA/ARP, EEB E.O. 12958: DECL: 10/27/2014 TAGS: ECON EFIN EIND EPET PREL SA SUBJECT: SAUDI BUSINESS LEADERS: WE'RE IN AN "L" CURVE REF: A. JEDDAH 0147 ¶B. RIYADH 1392 ¶C. JEDDAH 0288 JEDDAH 00000420 001.2 OF 002 Classified By: CG Martin R. Quinn for reasons 1.4 (b) and (d) ¶1. (U) Summary: At an October 27 roundtable lunch of the American Business Group of Jeddah (ABJ),hosted by the Consulate, eleven Jeddah business leaders described the current economic environment in KSA as the bottom of an "L" Curve -- the steep decline experienced 6 months ago has stopped, though significant improvement is not yet noticeable (ref A). The private sector is struggling and the government is dipping further into oil profits. Government spending on infrastructure has increased, but consumer confidence remains low, banks are still unwilling to lend, and real estate investments have been hampered by bureaucracy. The group also discussed H1N1's mixed effect on tourism. Attending the roundtable were the CG and two Pol/EconOffs. End Summary. Government increases spending, private financial -------------- --- sector struggles -------------- ¶2. (C) While banks are still wary of lending, Anees Moumina, Regional General Manager of Samba Financial Group, struck a much more optimistic tone compared to 6 months ago, even using the word "bullish." However, bank lending has been restricted only to the highest-credit borrowers with more restrictive terms. The group also mentioned the unwillingness of foreign banks to lend to Saudi companies due to the commercial dispute between two prominent families, Al-Sanea and the Gosaibis (ref B). Private funding has dried up, forcing possible government intervention in projects such as the King Abdullah Economic City (ref C). Notably, the government's increased investments have been in infrastructure rather than defense, as Raytheon has yet to win a new contract in KSA in the last few years. Consumer spending down 20%, GM's good practices -------------- -- ¶3. (C) The group agreed that consumer spending was down significantly, around 20% on average, and that car and luxury markets were hit harder than consumer staples. Businesses are scaling back by reducing advertising and spending only on special occasions. Most forecasted that 2010 would be better. Mr. Moumina pointed out that GM did a good job of addressing its bankruptcy by visiting its distributors and lending institutions in Jeddah to ease fears. Real estate prices increase but bureaucracy stifles mortgages -------------- -------------- ¶4. (C) Mohammed Abudawood, influential business leader and member of the Jeddah City Council, has seen housing prices rise in recent months, which is in line with recent forecasts, e.g., Egyptian investment bank EFG Hermes. However, the group discussed the difficulties with investment properties in KSA. The eviction of renters is difficult to enforce due to onerous legal standards: notary publics will not sign deeds over from individuals to banks due to Islamic concerns about "usury," no foreclosure laws exist, and lenders need to "grease the system" in order to repossess property (including cars). The "re-po" industry is alive and well in Jeddah. Additionally, the private mortgage market is not widely accessible. The growth of such a market will depend on Saudi authorities who are currently debating a proposed mortgage law for "Sharia compliance" and establishing rules for evictions, repossession and liquidation. Swine flu made Mekkah a "ghost town," little effect on aviation -------------- -------------- ¶5. (C) Due to swine flu, Ramzi Ali, of Saudi conglomerate JEDDAH 00000420 002.2 OF 002 Nesma, has seen a 40% drop in occupancy for cruises and hotels and Mr. Abudawood noticed the "ghost town" atmosphere in Mekkah, with hotel occupancy rates markedly down. Combined with some countries canceling Hajj, e.g., Tunisia, attendance at this year's pilgrimage is expected to be lower, although the Kingdom has tried to compensate for the drop by increasing other countries' Hajj quotas. However, the Hajj situation contrasts with the aviation sector experience of William Roe from the Binladin Group, who has seen aircraft utilization rates hold constant for all ranges of the price spectrum. Not all gloom -------------- ¶6. (U) The "L" Curve notwithstanding, there exists some optimism in the marketplace. Morgan Stanley recently forecast KSA's real output to grow by 4% each year for the next two years. Real estate prices are appreciating and if the mortgage law is passed, it may open up a multi-billion dollar industry and extend home ownership to lower and middle-income Saudis. ¶7. (U) Comment: The Kingdom has been in the bottom of the "L" Curve for a few months now, and people here are anxious to re-start business. With increased government support for private projects and the establishment of a mortgage market, Saudi Arabia should begin to show signs of a slow growth over the next year. End comment. QUINN