KIA PORTFOLIO DOWN $34 BILLION IN 2008

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000132 SIPDIS STATE PASS FEDERAL RESERVE E.O. 12958: DECL: 02/12/2019 TAGS: EFIN EINV ECON KU SUBJECT: KIA PORTFOLIO DOWN $34 BILLION IN 2008 REF: A. KUWAIT 130 ¶B. KUWAIT 111 Classified By: Econcouns Oliver John for reasons 1.4 (b) and (d) ¶1. (C) Summary: The Kuwait Investment Authority's holdings dropped by $34 billion during calendar year 2008, according to press reports. As of December 31, KIA's total holdings were about $210 billion. A senior KIA official told us that KIA had been moving aggressively into cash and fixed income assets over the past year, making its losses relatively smaller than those of other big investors. KIA also confirmed that it had committed one billion dollars to Dow's proposed take-over of Rohm and Haas, and would honor that commitment if Dow completed the transaction. End summary. KIA's portfolio drops 15 percent in 2008 -------------- ¶2. (U) After a closed door briefing on February 10, two Kuwaiti parliamentarians, Waleed Tabtabaei (Islamist) and Mohammed Al-Abduljadar (liberal),separately told the press that the KIA had lost around nine billion KD ($31 billion) in the first three-quarters of the 2008/2009 fiscal year (March 31-December 31). This represented approximately a 15 percent decline in KIA's holdings. Tabtabaei also told reporters that KIA had lost $1 billion on its Citibank investment (a third of the investment) and $1.2 billion on its investment in Merrill Lynch (about 58 percent). The National Assembly charged the State Audit Bureau with assessing the losses and reporting to parliament within 60 days. ¶3. (U) Several Kuwaiti papers carried a break-down of KIA's holdings (presumably provided by parliamentarians) for calendar year 2008. (Note: The slight difference between these figures and the quoted figures above probably reflects the difference between calendar year and fiscal year and the fact that the Parliamentarians were likely discussing KIA's Fund for Future Generations rather than total holdings. End Note.) General Reserve Fund -------------- January 1, 2008 - 14 billion KD ($48 billion) December 31, 2008 - 12 billion KD ($42 billion) Fund for Future Generations -------------- January 1, 2008 - 57 billion KD ($196 billion) December 31, 2008 - 49 billion ($170 billion) Total -------------- January 1, 2008 - 71 billion KD ($245 billion) December 31, 2008 - 61 billion KD ($210 billion) �00A;$3.43 = 1 KD (as of February 10, 2009) ¶4. (C) A senior KIA official (protect) confirmed to EconCouns that KIA had provided a closed door briefing to the National Assembly. He said that he was unable to confirm the press reports because of confidentiality restrictions, but stressed that both Tabtabaei and Abduljader had been at the briefing, and invited Econcouns to draw his own conclusions. When EconCouns noted that KIA's reported losses were much lower than those affecting other SWFs, the official admitted that KIA had been very lucky. About a year and a half earlier, KIA's strategy department had projected that the world financial system was heading for a downturn and KIA began moving out of equities to cash and fixed income investments. As a result, he noted, the press reported KIA as down 15 percent when the broader markets were down 30 percent. (Note: Other KIA officials have recently said that KIA's traditional asset allocation model calls for 60 percent equities, 20 percent bonds, 10 percent real-estate, 5 percent alternative investments, and 5 percent cash, but confirmed that cash holdings had increased significantly over the past year. KIA officials have also confirmed that the Authority had also increased its investments in government and corporate bonds. End Note.) KIA Committed One Billion to Dow -------------- ¶5. (SBU) The KIA official confirmed news reports that KIA had provided Dow with a one billion dollar equity commitment for its purchase of Rohm and Haas (along with a three billion dollar commitment from Berkshire Hathaway) on October 27, ¶2008. (Note: KIA signed a commitment to purchase one million shares of convertible preferred stock. Each share can be KUWAIT 00000132 002 OF 002 converted to 24.2 shares of common stock under certain conditions. End Note.) The official stressed that KIA would honor that commitment, contingent on Dow completing the purchase of Rohm and Haas. He declined to be drawn on reports that KIA was thinking about increasing its stake in the deal. Kuwait to Host SWF Working Group in April -------------- ¶6. (SBU) Kuwait will host the next meeting of the SWF working group on April 4-5, during which the group will finalize the details for setting up a Sovereign Wealth Fund Forum. According to KIA, the forum would serve more as a think tank than a body empowered to amend the Santiago Principles. Any amendments would need to be approved by the Working Group and ratified by the home countries. Kuwait has offered to host the forum secretariat. Comment -------------- ¶7. (C) Despite a 2008 portfolio performance that seems to have outperformed most of the world,s leading asset management firms, the KIA,s losses of $31 billion are adding to jitters in the Kuwaiti body politic. Oil revenues have collapsed (and most analysts think they will stay low for the next year),Kuwaiti investment companies are reeling from prospective debt defaults, and the Parliament will almost certainly approve -- and possibly add to -- a multi-billion dollar financial rescue package (Ref B). Although we assess that Kuwait's overall reserves are sufficient to weather the global economic crisis for the next few years, current GoK-National Assembly tensions could stymie action or drive up the potential costs of any rescue package. ********************************************* ********* For more reporting from Embassy Kuwait, visit: visit Kuwait's Classified Website at: http://www.intelink.sgov.gov/wiki/Portal:Kuwa it ********************************************* ********* JONES