SAUDI ARABIA: INFORMATION FOR G-20 MEETINGS

UNCLAS SECTION 01 OF 03 RIYADH 000406 SENSITIVE SIPDIS STATE FOR EB/OMA (WHITTINGTON) TREASURY FOR IMB (MURDEN, MONROE, BEASLEY) E.O. 12958: N/A TAGS: EAID ECON EFIN SA SUBJECT: SAUDI ARABIA: INFORMATION FOR G-20 MEETINGS REF: A. A. SECSTATE 17502 ¶B. B. RIYADH 160 ¶C. C. 08 RIYADH 1880 ¶D. D. 08 RIYADH 1850 ¶E. E. 08 RIYADH 183008 ¶F. F. 08 RIYADH 1629 ¶G. G. 08 RIYADH 1572 ¶1. (SBU) Key points: -- The Saudis have not publicly advocated specific changes to the international financial system; -- The Kingdom's greatest concern is to keep its banks healthy, and to that end it has added liquidity to the largest banks and stands ready to do so again. -- Due to the drop in oil revenues, some major infrastructure and industrial projects have been "delayed," but there have been no prominent voices calling for protectionist measures; -- Saudi Arabia has passed a large, countercyclical budget; -- Saudi officials believe that the Kingdom can withstand the current crisis for another "two years" without serious repercussions; and, -- Recently the Embassy has noted Saudis and local expatriates have adopted an increasingly gloomy assessment of the USG's ability to come to grips with the financial crisis. -------------- ¶I. Run-up to the London Summit: Questions A, B, C, and D -------------- ¶2. (SBU) Apart from bromides about "the need for greater caution and tighter regulation of the financial markets" and hopes expressed for an early end to the crisis, the KSA has not publicly advocated specific fundamental changes to the international system. ¶3. (SBU) We have picked up indications, however, that Saudi Arabia now seems disinclined to broaden representation at the G-20. The Kingdom relishes its status as the sole Arab member of the G-20. ¶4. (SBU) The number of articles extolling the virtues of Islamic banking over conventional banking have decreased. Nonetheless, the KSA would probably garner public support if it mentioned the principles of Islamic banking at the upcoming G-20 preparatory meetings. -------------- RIYADH 00000406 002 OF 003 II. Impacts of the Global Financial Crisis: Questions E, F, and G -------------- ¶5. (SBU) The KSA's greatest concern is to maintain the health of its banks. The most categorical statements the KSA had made about the financial sector are that the Saudi Monetary Authority (SAMA) stands ready to inject as much liquidity as necessary to assure the solvency of local banks. In October, SAMA reduced its key lending rate by 50 basis points, cut its demand deposit reserve requirement from 13 percent to 10 percent, followed by directly injecting both U.S. dollars and Saudi Riyals (SR) into local banks through deposits. Further, for the first time, the Saudi Supreme Economic Council explicitly guaranteed bank deposits. ¶6. (SBU) Of the 10 largest commercial banks, only Saudi Hollandi bank reported an increase in its 4th quarter profits over 2007, and this largely due to lower than normal profits in late 2007. National Commercial Bank, the nation's largest, reported a 4th quarter loss of $680 million, primarily due to write downs following the acquisition of a Turkish bank, Turkiye Finans Katilim Bankasi and the downturn of the Turkish economy. Eight other banks reported either losses or lower profits. In the wake of the poor performance by local banks, SAMA further reduced its key lending rate to two percent. -------------- III. The Broader Economic Crisis: Questions H, I, J, and K -------------- ¶7. (SBU) The resulting drop in oil revenues has caused the "delay" of major projects throughout the Kingdom. Businessmen throughout the Kingdom report that credit is very difficult to obtain. ¶8. (SB) KSA officials have assured us that there is "no discussion" about imposing new tariffs or raising current ones. In fact, the KSA seems on track in its WTO commitments to continue lowering tariffs. Inflation has slowed from a high of about 11 percent last summer to around seven percent. Nonetheless, popular discontent about the high cost of living is increasing, but so far this dissatisfaction has been directed at specific retailers such as auto dealers. There has been no broader call for protectionism. ¶9. (SBU) KSA senior officials recently assured a delegation from the New York Fed that the Kingdom intends to maintain the $1/SR 3.75 peg. -------------- -------------- IV. Near-term Outlook and Political/Foreign policy Ramifications: Questions L, M, N, O, P, and Q -------------- -------------- ¶10. (SBU) In December, the Saudi Council of Ministers endorsed the 2009 budget, the largest in the history of Saudi RIYADH 00000406 003 OF 003 Arabia. It is widely viewed as countercyclical and confidence building. The 2009 budget forecasts a deficit of $17 billion, compared with a surplus of $157.3 billion in ¶2008. ¶11. (SBU) GDP growth for 2009 is expected to drop to as low as 1.5 percent compared with 5.7 percent in 2008. Officials in the Ministry of Labor reiterate their policy to fire foreign laborers first to cushion Saudis, but are quick to note that so far there have been no discernable reductions in the Kingdom's six million person foreign labor force. ¶12. (SBU) The chief challenge presented by the financial crisis is its impact on the real economy caused by the drop in oil revenues, which itself stems from the fall in international demand and economic activity. In a highly unusual move, King Abdullah in December announced what he deemed a "fair price" for oil: $75 per barrel. The country's 2009 budget reportedly is predicated on an average Saudi oil price of around $36 per barrel (equivalent to about $43 per barrel for West Texas Intermediate crude). The current price the Kingdom is receiving is around $34 per barrel. ¶13. (SBU) Saudi officials tell us that that the Kingdom can withstand the current downturn for another two years without serious repercussions, but that a slump extending as long as five years might prove problematic. ¶14. (SBU) The most likely effect the crisis will have on the Kingdom's security policy and economic support for U.S. interests will be an increasing difficulty in providing financial assistance to troubled regions. To date, however, the KSA has not pleaded the financial crisis in the context of its foreign aid policy. ¶15. (SBU) In the past month, post officers have noted a growing critical tone about USG "responsibility" and handling of the financial crisis. In early February, the then SAMA Vice Governor (later promoted to Governor) expressed to a visiting New York Fed delegation his hope that the crisis would result in a more integrated supervisory regime in the United States. Expat economists, who were hitherto sanguine about the Troubled Assets Relief Program to resolve the crisis, have become more pessimistic, and even dismissive of U.S. efforts. FRAKER