FED DISCUSSES TARP, DOLLAR PEG DURING VISIT

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000291 NOFORN SIPDIS DEPT FOR E, EEB/IFD/OMA, AND NEA/ARP E.O. 12958: DECL: 02/10/2019 TAGS: EFIN EINV ECON PREL SA SUBJECT: FED DISCUSSES TARP, DOLLAR PEG DURING VISIT Classified By: Charge d'Affaires Sandra Muench for reasons 1.4 (b) and (d) Key points -------------- ¶1. (C/NF) -- Private banks in Riyadh were most concerned by the increase in U.S. debt and the effect this would have on the dollar, as well as the size of the increase in the Federal Reserve's balance sheet. -- SAMA Vice Governor Jasser told the group the SAG's decision to stick with the dollar - riyal peg was a business decision and that SAMA's position in support of the peg was clear. -- Jasser also emphasized the U.S. must learn from the current economic crisis and develop a more integrated supervisory regime for the financial sector. -- Banks in the Kingdom are lending money, but mostly to preferred clients and not in quantities large enough to support the mega-infrastructure projects. End key points. Comment -------------- ¶2. (C/NF) Bankers here in the Kingdom are extremely concerned by what is going on in the U.S. economy and its effect on global economic conditions. Jasser's comments on the riyal - dollar peg are reassuring in the short and medium term, but while he and others made it clear the GCC currency union will not happen on schedule, they do expect it to happen eventually (resulting in a de-pegging of the riyal from the dollar). While the credit situation in the Kingdom does seem to be easing, large infrastructure projects are depending heavily on SAG support to continue as local banks do not have the resources to support them and international banks are not lending. Fortunately a 35% increase in capital expenditures in the SAG's 2009 budget should ensure this financial support remains available. End comment. New York Fed comes a knocking -------------- ¶3. (SBU) Three representatives from the Markets Group and one from the Emerging Markets Group of the New York Federal Reserve Bank visited Riyadh on February 4 to meet with local banks and regulatory bodies. Their delegation was headed by Hayley Boesky, Vice President and Director of Market Analysis. At the beginning of each meeting they explained that the primary purpose of their trip was to open channels of communication to banks in the region and to answer any questions local banks and regulatory bodies might have about recent measures the Fed has taken to alleviate the financial crisis. Private banks concerned by U.S. debt -------------- ¶4. (C) During their first meeting, with Banque Saudi Fransi Treasurer Walid Fatani, Banque Fransi officials expressed concern about the ability of the U.S. to continue financing its debt and about the strength of U.S. treasuries. Fatani disclosed that although the bank does not currently invest in treasuries, it has considered doing so in the future. Boesky stressed that demand for treasuries were still high as they are generally perceived to be the safest and most secure investment available. ¶5. (C) Later, at Saudi British Bank, further concerns about the U.S. economy were raised by Treasurer Walid Khoury and Chief Operating Officer Richard Groves. Specifically, they were concerned about the magnitude of increases in the Fed's balance sheet and the effect this would have on the size of the money supply. Boesky reassured them, emphasizing the variety of options the Fed has available to quickly increase or decrease the size of their balance sheet. Khoury provided details on the mixed situation confronting the banking sector in Saudi Arabia, stating that while in general difficult conditions have eased, banks are not lending their excess liquidity, instead storing it for minimal return at the Saudi Arabian Monetary Agency (SAMA). He added that SAMA's rapid decision in early October 2008 to move from a counter-inflationary strategy to one of freeing up credit has caused confusion at the commercial banks that will take time to "digest." RIYADH 00000291 002 OF 002 Jasser on the dollar peg and the economic crisis -------------- --- ¶6. (C/NF) In two separate meetings at SAMA, the first with SAMA's investment division, which is responsible for investing SAMA's holdings overseas, and the second with Vice Governor Mohammed Al-Jasser, Boesky and her team answered questions about the Troubled Asset Relief Program (TARP) and about the U.S. dollar - Saudi riyal peg. Jasser emphasized that the SAG's decision not to follow in Kuwait's footsteps in de-pegging their currency from the dollar was not an emotional one, but rather a "cold-blooded business calculation." He further stated that SAMA's position on the peg was clearer than any other central bank in the region and that this is not an area for ambiguity. ¶7. (C) Discussing the broader economic situation, Vice Governor Jasser said "the storm is still swirling" and fallout from the financial crisis is just starting to be felt in the real economy. He felt Saudi Arabia was "in the eye of the storm more than anybody," but would not escape entirely unscathed from the current economic turmoil. Jasser also said if the current crisis results in a more integrated supervisory regime in the U.S. financial sector, "it may be worth it." In recent media reports, Jasser has touted SAMA's enforcement of conservative banking practices in the Saudi financial sector as a model for the world to follow. Credit tight but improving -------------- ¶8. (C) Boesky and the other two members of the Markets Group finished off their meetings by paying a quick courtesy call on Dr. Abdulrahman Al-Tuwaijiri, the chairman of the Capital Markets Authority. Robert Lerman from the Emerging Markets Group held one additional meeting with Paul Gamble, the head of research at Jadwa Investments, a privately held investment firm. Gamble addressed the current credit situation in the Kingdom, saying the banks are lending, but mostly to preferred customers and that the international credit situation is particularly relevant to large infrastructure projects as Saudi banks are not large enough to bankroll these projects. He also commented briefly on the proposed GCC currency union, saying there is no way it will happen by 2010 as originally scheduled. ¶9. (U) The Federal Reserve team did not have an opportunity to clear this cable. MUENCH