BANKERS SANGUINE ABOUT SAUDI ECONOMIC PROSPECTS

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001472

SIPDIS

DEPT FOR NEA/ARP, EEB

E.O. 12958: DECL: 11/02/2019
TAGS: ECON EFIN EINV SA
SUBJECT: BANKERS SANGUINE ABOUT SAUDI ECONOMIC PROSPECTS

REF: A. ABU DHABI 1008

B. RIYADH 1392

C. RIYADH 1340

Classified By: CDA Susan L. Ziadeh for reasons 1.4 (b) and (d)

Summary
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1. (C) Private bankers and government officials in Saudi
Arabia insist that domestic Saudi banks did not receive
special treatment in the AHAB - Saad Group dispute, despite
protests by overseas lenders to the contrary. Embassy
contacts contend that Saudi banks just wrote better loans
that required strong collateral commitments by the Saad
Group, a position that we cannot verify and that non-Saudi
lenders have threatened to challenge in court if an accord is
not reached. The Al-Gosaibis' debts have yet to be settled
as their collateral consisted of less liquid assets such as
real estate, according to SAMA and private bankers. Saudi
bankers (who stand to gain from reduced competition) do not
expect any slowdown in international lending to have a
significant effect on the economy, nor do they expect it to
last long if it does indeed materialize. End summary.

AHAB - Saad Group Dispute
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2. (C) During a recent discussion with a Western ambassador,
central bank Governor Dr. Muhammed Al-Jasser said that there
had been no "deal" favoring domestic Saudi banks at the
expense of international banks in terms of their dealings
with Maan Al-Sanea's Saad Group. Instead, they had exercised
a clause in their contracts with Saad Group allowing them to
seize certain assets which had been used as collateral for
the loans they had extended, he said. Al-Jasser continued,
saying international banks should have had the foresight to
write similar clauses into their contracts. (Note: Overseas
banks state that the Saad Group committed fraud by pledging
the same collateral to multiple recipients. They complain
that the Saudi banks unilaterally seized this collateral,
ignoring legitimate claims by non-Saudi lenders. End note.)
He did confirm that he had personally fired Saud Al-Gosaibi
from Samba bank's board, as has been alleged in recent press
articles. According to the ambassador, Al-Jasser did not
seem particularly concerned about a slow down in
international bank lending in the Kingdom, quoting him as
saying most of the lending comes from domestic banks and the
government. (Note: Jasser's position on international
lending contradicts statements made by SAMA prior to the
dispute. In the wake of the financial crisis when
international credits to Saudi dried up, SAMA routinely noted
the importance of international lending to the Kingdom and
closely followed international credit conditions. End note.)


3. (C) A senior officer at one of the Saudi banks that
settled with Saad Group echoed Al-Jasser's comments, saying
Saad Group had committed Samba shares, held by Samba, as
collateral for their domestic loans. He further said a
condition of the Saudi government's forcing Saad Group to
comply with these obligations was that the banks receiving
Samba shares could not sell them (it was unclear what the
time limit was on this requirement). This banker, and
others, also said that this resolution came about as part of
a "standard" resolution committee process that SAMA has
employed for years and is similar to how other countries
resolve problem loans -- they follow the contracts. The
banker believed these settlements cleared the Saad Group's
domestic debts and that international debts would be covered
by assets seized in the Cayman Islands that belonged to the
Saad Group's Geneva "hedge fund." On the other hand, he said
the Al-Gosaibis' debts would take longer to clear as their
assets were less liquid (mostly real estate and business
concerns) and that the bank's external auditors had recently
directed banks to increase their provisions on Al-Gosaibi
loans from 21 percent to 25 percent. He expected his bank to
increase their provisions to 30 percent in early 2010.

Economy Recovering Slowly
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4. (C) In several meetings with private commercial and
investment bankers, the message on the general economy was
the same: while 2009 is expected to see a 1 to 1.5 percent
drop in GDP in the Kingdom, non-oil GDP is expected to show

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moderate growth and, in 2010, the economy is expected to show
significant growth. According to senior officers at the
Olayan Financing Company, a holding company with 30 companies
in 7 sectors, the two negative factors limiting the Saudi
economy at the moment are the AHAB - Saad Group dispute and
the collapse of the real estate market in Dubai. They said
they were concerned about the lack of warning in advance of
Maan Al-Sanea and the Al-Gosaibis' defaults, the perception
that domestic banks might be getting a sweetheart deal, and
the size of the defaults relative to the size of the Saudi
commercial debt market. That said, they expect to see
long-term benefits from the defaults, in that they expect
local banks to demand greater transparency from their clients
and greater due diligence from their loan officers. The
Olayan Group representatives said any slowdown in lending by
international banks would be temporary as they "have short
memories."


5. (C) Dr. Fahad Al-Mubarak, chairman of Morgan Stanley Saudi
Arabia, of the Saudi Stock Exchange (the Tadawul),and former
Shoura council member, told Econcouns on October 27 that
Saudi Arabia does need international bank lending as local
banks are not large enough to finance infrastructure mega
projects and, while the government provides some financing,
international banks provide much of the rest. That said, he
also said that international bank lending will return to the
GCC countries as the banks realize that this is the region of
the globe that will most quickly return to high levels of
economic growth. Al-Mubarak said he sees the AHAB - Saad
Group dispute not as two problems, but as one: Maan Al-Sanea.
He said Al-Sanea destroyed his own business and his in-laws'
(the Al-Gosaibis) business and that this is not a trend or
phenomenon that is going to spread to other family businesses
in the region.


6. (C) During an October 28 meeting with senior officers at
Riyad Bank, they told Econcouns that while international
lending was still important for mega projects, it was not as
important as it used to be for other economic activity. They
said that if the AHAB - Saad Group dispute temporarily
reduces international bank lending in the Kingdom, it will
actually be good for them as it will lessen the fierce
competition for Saudi market share. According to Riyad bank
officials, international banks have, historically, been far
more likely to lend without collateral to Saudi companies
based on family names than domestic banks. According to
them, domestic banks are particularly insistent on collateral
when the loan is to a family company.

Comment
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7. (C) While private bankers and officials in Saudi Arabia
insist that there was no sweetheart deal for domestic Saudi
banks in the AHAB - Saad Group dispute, the international
uproar will likely continue until an accord with overseas
lenders is reached. Although Saudi bankers and finance
officials express confidence that any reduction in
international credit lines will be temporary and
insignificant, a comprehensive resolution consistent with
international bankruptcy standards is clearly in the best
interest of the greater Saudi economy going forward.
ZIADEH