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
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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
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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
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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
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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