IS THE JEDDAH ECONOMY FALTERING?

UNCLAS SECTION 01 OF 02 JEDDAH 000065 SENSITIVE SIPDIS AMEMBASSY RIYADH PASS TO AMCONSUL DHAHRAN USDOC PASS TO FCS RIYADH,JEDDAH DEPARTMENT FOR NEA/ARP E.O. 12958: N/A TAGS: ECON EFIN EIND EPET EINV PREL SA SUBJECT: IS THE JEDDAH ECONOMY FALTERING? REF: 08-JEDDAH 0497 ¶1. (SBU) Summary. At a February 10 lunch roundtable, hosted by CG on behalf of the American Businessmen in Jeddah (ABJ), leading members painted a gloomy economic picture across nearly all sectors of the local economy. The candid admission by one participant that Saudis have been in denial for the past six months was seconded by all present. End Summary. ¶2. (SBU) Business leaders from local and international companies compared notes Tuesday, February 10, on various topics ranging from retail trade dislocations to the future of infrastructure projects in the Kingdom and the dearth of capital available in the market. In a discussion led by ABJ Vice President and Samba Bank Regional General Manager Anees Moumina, participants described worsening conditions in every sector in the Jeddah region including state-financed infrastructure projects. ¶3. (SBU) Real estate prices for residential and commercial buildings are reportedly down ten percent from 8-12 weeks ago with land prices down an estimated 40 per cent. Rents for local retail space are dropping rapidly as real estate developers try to create cash flow from the many empty stores at recently launched shopping malls. While not as depressed as the collapsing real estate market in Dubai, the decline in the value of property is having the effect of unraveling local supermarkets. According to a leading businessman whose company manufactures a large variety of consumer goods including Clorox brand products, a number of cash-short supermarket chains are stretching payments to suppliers from 30 to 60 days or, in some cases, failing to pay suppliers. Apparently these chains are owned by companies with large real estate interests -- particularly mall properties (every new mall in Jeddah features a major supermarket). These companies were using cash flow from the supermarkets to finance their real estate ventures. As money becomes tight and real estate prices fall, the supermarket chains are now using their suppliers as make-shift lenders in order to stay afloat. Some suppliers have reportedly stopped delivering product and at least one supermarket, the French chain Geant, is widely rumored to be near to closing with only a facade of product on each shelf and no back inventory. ¶4. (SBU) A participant who sits on the board of the Jeddah Redevelopment Company which is responsible for a vast project still in the planning phase in the center of the city, reported that every single developer who has signed an MOU with the company is likely to delay their project at least nine months and that the company recently decided to send out a questionnaire to all contracting parties to get a clearer picture of the overall situation. ¶5. (SBU) Banks have no money to lend. According to Moumina, banks are required to maintain a loan-to-capital ratio of 85 percent and all the banks have reached that level. Unless they can raise new capital they will be unable to lend, even to viable customers. So while rates are low -- roughly two percent above SIBOR -- there is no money actually in the kitty. Moumina said that local banks are in a somewhat better position than international banks headquartered outside the Kingdom since the latter generally only make a small percentage of their capital available for lending in teh KSA keeping the majority for lending in the country where they are based (the UAE, Bahrain, etc.). He gave the example of Citibank whose regional headquarters in the Gulf recently saw its capital cut by as much as 50 percent by the parent company. Participants suggested there are three ways for businesses to find money now: (1) borrow abroad, (2) obtain government funding, or (3) float an IPO. The last is a non-starter in the current climate since confidence in the Saudi stock market has been battered by volatility and large losses. Whether the government will come to the rescue is a question on everyone's mind. ¶6. (SBU) The local manager of Raytheon said that a defense contract his company bid on has been put on hold for at least six months. According to some of the participants, this tracks with reports that the government has moved hospitals and schools and other infrastructure projects focused on the man-on-the-street up the priority list and moved defense down. It is unclear where mega projects such as the Haramain Railroad from Jeddah to Makkah and Medina, the Land Bridge rail project across the Kingdom (off, on, and now off again), JEDDAH 00000065 002 OF 002 the redevelopment of Makkah and Medinah and other government-funded projects stand at this juncture. ¶7. (SBU) In a Wednesday afternoon meeting with members of the large Alireza merchant clan, one very senior business leader and investment company CEO opined that no one in Jeddah is expecting to make money these days, just trying to keep what they have. ¶8. (SBU) Comment: Remarks from Jeddah businessmen contrast sharply with assessments from Saudi officials who, while acknowledging that the economy is passing through hard times, downplay the likelihood of long-term negative effects. One test of the true state of the economy will be whether large public works projects, which are important both commercially and politically, go ahead as planned. End Comment. QUINN