CENTRAL BANK GOVERNOR ON RESPONSE TO ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000023
SIPDIS
STATE FOR NEA/ARP, EEB/IFD/OMA, EEP/EPPD
STATE PASS FEDERAL RESERVE
ABU DHABI FOR TREASURY ATTACHE
E.O. 12958: DECL: 01/12/2019
TAGS: EFIN EINV ECON KU
SUBJECT: CENTRAL BANK GOVERNOR ON RESPONSE TO ECONOMIC
CRISIS
REF: KUWAIT 8
KUWAIT 00000023 001.2 OF 002
Classified By: Econcous Oliver John for reasons 1.4 (b & d).

1. (C) Summary: On January 9 Kuwait Central Bank Governor
Sheikh Salem Abdulaziz Al Sabah told Ambassador that his
priority was to ensure the stability of Kuwait’s banking
system. Although he acknowledged the challenges facing
Kuwait’s 95 investment companies, he dismissed any systemic
impact from the potential failure of the "eight to ten" that
needed help. Clearly distinguishing (albeit somewhat
disingenuously) between investment banks (&we have none8)
and &investment companies,8 he argued that company
shareholders would be responsible for deciding whether to
recapitalize the companies, but did not rule out GoK
assistance to deserving companies. Sheikh Salem explained
that the December GCC decision on currency union did not mean
that the GCC states would have a common currency by end-2009,
but that they would set up a monetary board to coordinate
policy by 2009. He dismissed as impossible the suggestion
that the GCC could create a common currency by the end of the
year. The Governor refused to be drawn into a discussion on
the GoK decision to cancel the Dow deal, though he is clearly
concerned about the depth and length of the global economic
downturn and the need to preserve Kuwaiti assets. End
summary.
Protect the Banking System
--------------

2. (C) Sheikh Salem expressed his view that 2009 would be an
even more difficult year for the world, both politically and
economically than was 2008. He stressed that the Central
Bank’s priority was to protect the country’s banking system,
which he described as stable, though he was unwilling to be
drawn on details. Ambassador, citing Global Investment
House’s default on a $200 million structured loan payment,
asked whether he was concerned about the state of Kuwait’s 95
investment companies. Sheikh Salem acknowledged that there
were problems with the investment companies. In contrast to
many observers in the financial community, however, he said
that only around 8-10 of the companies would need help and
that there would be no systemic impact if they failed.

3. (C) Sheikh Salem insisted that the first responsibility
for rescuing the Investment Companies lay with the company
shareholders. If they were unwilling to risk additional
capital, it should not be the government’s responsibility to
bail them out. If a company were insolvent, it should fail.
If illiquid, it would be up to the shareholders to work with
creditors to reschedule payments. Since bankruptcy
procedures took an unreasonably long time in Kuwait, an
average of 7-8 years, it could be advantageous for
shareholders and creditors to work out their own
arrangements. He speculated that the GoK would assist
worthwhile companies with liquidity problems, as long as the
company’s shareholders were willing to take the lead. He
cautioned that using public funds would require legislation,
which the government would not push until a new cabinet was
formed. When Ambassador asked whether Global CEO’s reported
multi-million Kuwaiti Dinar compensation package would be
considered in any bail-out discussion, the Governor
categorically stated that it would.
GCC Currency Union ) A First Step
--------------

4. (SBU) Sheikh Salem explained that the recent GCC decision
on monetary union was a necessary first step, but denied that
there would be a common currency by end 2009. He said that
the GCC had decided to create a monetary board by end 2009.
He added that there was still a debate on who would host the
monetary board, with both Qatar and Bahrain offering, but
that the even bigger question would be who would host the
Central Bank. This issue, he added, was raised but not
discussed at the GCC meeting. Sheikh Salem emphasized that
the GCC members needed to be both transparent and realistic
in their plans for monetary union. For its part, Kuwait
would need to amend several laws, which would raise its own
unique parliamentary challenges. (Note: Ministry of
Finance U/S Khalifa Hamada told Econcouns that only Kuwait,
Qatar, and Saudi Arabia had approved the common currency
initiative in December. Both Bahrain and the UAE had
expressed reservations and Oman continued to say that it
would not join in the near term. Hamada said that Kuwait
would join with the majority, but cautioned that the articles
of agreement stated that 5 GCC countries had to join for the
KUWAIT 00000023 002 OF 002
currency union to come into effect. End Note.)
Dow
---

5. (C) Ambassador expressed her deep disappointment in the
collapse of the K-Dow joint venture, noting the need for
Kuwait and the U.S. to expand their partnership beyond its
strong political/military foundations and for Kuwait, in
particular, to develop and diversify its single commodity
economy. The K-Dow package had included an R&D center to be
built in Kuwait, which would have been an extremely positive
development. Sheikh Salem agreed, but when Ambassador asked
whether the Governor, who sits on the Supreme Petroleum
Council, could shed light on the government’s decision to
reverse itself on Dow, he refused to be drawn in, saying
simply "this was a complicated issue that doesn’t leave room
for black or white decisions." (Note: KPC General Council
Sheikh Nawaf Al-Sabah (protect) told Econoff that he
suspected that the Central Bank Governor expressed his view
that the global economic crisis would be lengthy during the
cabinet meeting, and that this had a significant impact on
the ultimate decision. End Note.)
Comment
--------------

6. (C) Although the Governor heads the GoK’s committee to
deal with the impact of the global financial crisis, he
clearly indicated his belief that this would be best
accomplished by ensuring the stability of the country’s
banking sector. It is also the area that is under his direct
control. He was clearly more reluctant to commit public
funds to stock market or investment company bail-outs, noting
repeatedly that the companies were "investment companies not
investment banks." This reluctance mirrors what we have
heard from other committee members. As previously noted,
parliamentary objections to any "misuse" of public funds and
the sharp drop in Kuwait’s oil and investment revenue likely
play a role in this reluctance (ref a). Based on the
Governor’s remarks, however, it also appears as if he
believes that the GoK will need to husband its assets to meet
future economic challenges and that he is also reluctant to
"throw good money after bad." End Comment
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For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s
Visit Kuwait’s Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
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JONES