IMPACT OF DUBAI DEBT RESTRUCTURING ON SAUDI ARABIA

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 001596 SIPDIS DEPT FOR NEA/ARP AND EEB E.O. 12958: DECL: 12/09/2019 TAGS: ECON EFIN EINV SA SUBJECT: IMPACT OF DUBAI DEBT RESTRUCTURING ON SAUDI ARABIA TO BE LIMITED REF: A. RIYADH 1472 ¶B. RIYADH 1392 Classified By: Charge d'Affaires Susan L. Ziadeh for reasons 1.4 (b) an d (d) Summary -------------- ¶1. (C) Despite initial concerns that Dubai's debt crisis could impact the Saudi economy, all indications are that any effect here will be minimal. Senior government officials, bank officers, and analytic reports from major international banks all suggest that Saudi banks have minimal exposure to Dubai entities. Some have even suggested the Saudi economy could benefit from Dubai's misfortune as private Saudi investors divest from Dubai and bring their money home. End summary. Officials Say Banks Only Minimally Exposed -------------- ¶2. (C) In recent conversations with Regional Treasury Attache, Deputy Finance Minister Sulaiman Al-Turki and Saudi Arabian Monetary Agency (SAMA) Vice Governor Abdulrahman Al-Hamidi, they said the SAG is well prepared to handle any fallout from the Dubai debt crisis. Saudi banks have minimal exposure to Dubai World and that the bulk of Saudi exposure is held by private individuals. ¶3. (U) On December 4, SAMA Governor Muhammed Al-Jasser told the media that Saudi banks' exposure to Dubai World made up less than 0.2 percent of their balance sheets. He said Dubai's debt crisis does not present any danger to the Kingdom's banking system. Private Bankers See Little Cause For Concern -------------- ¶4. (C) A senior vice president at Riyad Bank told Econoff on December 6 that the media had overreacted to Dubai World's announcement. He said it did not help matters that the government in Dubai was not particularly communicative. The VP said Saudi banks have a small amount of exposure, but that it's likely secured and not enough to have a significant impact on their bottom line. He also speculated that Dubai's troubles could actually help the Saudi economy as banks pulling back from overseas exposure would have more money to lend in the Kingdom. He said that, going forward, Saudi banks will be careful who they lend to, but no more so than is already the case. ¶5. (C) A senior vice president of the Olayan Financing Company, generally shared these views, but thought there could be a small negative insofar as international banks lending to private companies in the Middle East may be reluctant to continue such lending, in effect painting the region with a broad brush. On the other hand, a National Commercial Bank senior vice president said international banks distinguish between Dubai and the rest of the region, as well as between productive infrastructure projects and speculative real estate ventures, and would likely continue lending to projects and companies in the Kingdom. He said NCB has no exposure to Dubai World and that concern in the Kingdom was fading, particularly following Al-Jasser's public comments. Bank Reports Upbeat on Saudi Companies -------------- ¶6. (SBU) Several analytic pieces by local and international banks put out in response to the Dubai crisis suggest it will either have little impact on the Kingdom, or even that investors will look to Saudi Arabia as a destination for investment that otherwise would have gone to Dubai. On November 30, reports from Bank of America Merrill Lynch and from Credit Suisse identified Saudi Arabia, Qatar, and Egypt as likely beneficiaries from investors' looking for Middle East alternatives to Dubai. On December 3, Deutsche Bank put out a strategy paper titled "Buy Saudi on Dubai-related weakness" and EFG Hermes said the direct impact on Saudi banks should be "relatively contained." RIYADH 00001596 002 OF 002 ¶7. (SBU) A report issued by Saudi investment house Jadwa concurs with the others' assessment of a very mild impact on the Saudi banking sector, but identifies the impact on Saudi companies doing business in Dubai as a minor area for concern (A recent article in the Arabic daily Al-Riyadh claimed real estate developers in the Eastern Province were holding up new projects until they determined how developments in Dubai would affect them). Also, the report points out that this crisis will provide the first serious test for the mechanism for resolving legal issues related to sukuk (Islamic bonds) and, if handled poorly, could impact the future issuance of sukuk. Comment -------------- ¶8. (C) Dubai's debt crisis is unlikely to have a significant near-term impact on the Kingdom's economy. What international lending was going to leave the Kingdom due to a lack of corporate transparency already did so following the emergence of the ongoing problems at the Saad Group and the AH Al-Gosaibi and Brothers Company in April. Saudi bank exposure to Dubai World is minimal and most Saudi companies focus on the large domestic market rather than on doing business in Dubai. All that said, Dubai's troubles are likely to delay the return of the international banks spooked by the Saad - Al-Gosaibi crisis. The unravelling of sukuk bonds could also affect future prospects for similar funding here. End comment. ZIADEH