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),

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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