SAUDI ADVISOR ON THE IMF, DOLLAR PEG

C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000788 NOFORN SIPDIS DEPT FOR NEA/ARP, EEB TREASURY FOR ANDREW BAUKOL CENTCOM FOR MICHAEL GOEFELLER E.O. 12958: DECL: 06/13/2019 TAGS: ECON EFIN EINV PREL SA SUBJECT: SAUDI ADVISOR ON THE IMF, DOLLAR PEG REF: RIYADH 653 Classified By: CDA Ambassador Richard Erdman for reasons 1.4 (b) and (d ) ¶1. (U) Key points: -- (C/NF) According to a key Post contact, quiet, behind-the-scenes diplomacy will be most effective in convincing the Saudis to make greater contributions to the IMF. -- (C/NF) The SAG is supporting, and will continue to support, the dollar, but could have to re-think this approach if the dollar weakens to the extent that the Kingdom's inflation sky-rockets. -- (C) While banks in Saudi Arabia do not appear overly exposed to the global financial crisis, the families that control them may be. -- (C) The solvency of the family conglomerates is a sensitive issue that our interlocutor was unwilling to discuss in more detail. -- (C) Recent public comments by Oil Minister Naimi on the price of oil are significantly more bullish than we were hearing even a month ago. IMF: QUIET DIPLOMACY MOST EFFECTIVE -------------- ¶2. (C/NF) Charge met with Saudi British Bank chief economist Dr. John Sfakianakis on June 10 to discuss the general economic health of the Kingdom. (Note: Sfakianakis, a well-informed and long-time Embassy contact, is also a special advisor on economic issues to the Ministry of Commerce by royal decree. As such, he helps shape Saudi leadership's opinions on financial issues. End note.) During a discussion of the Saudis' role at the International Monetary Fund (IMF),Sfakianakis cautioned us to approach this issue in private and to not push the SAG too hard, citing recent damage to the Saudi-British bilateral relationship as a result of British Prime Minister Gordon Brown's strong-arm approach vis-a-vis the Saudis on this issue. ¶3. (C/NF) The Saudis will eventually contribute more to the IMF, but will do so quietly and over time. Such additional contributions are domestically unpopular and in exchange the SAG will definitely be looking for a greater role in IMF decision-making. SAG SUPPORTING DOLLAR, FOR NOW -------------- ¶4. (C/NF) Sfakianakis was adamant that the Saudis are supporting the dollar, both through the public comments of central bank governor Mohammed Al-Jasser and the private 
efforts of Finance Minister Ibrahim Al-Assaf. Apparently last summer, then-central bank governor Hamid Al-Sayari told the Emirati central bank governor to "stop talking about" de-pegging from the dollar because it was counterproductive and was harming the Gulf economies. Nevertheless, if the dollar weakens too much and, as a result, the Kingdom imports double-digit (or greater) inflation, the SAG's hands will be tied politically and they will have no choice but to float their currency. Sfakianakis pointedly added that all the Kingdom's anti-inflationary measures failed last summer, with prices eventually stabilizing due to extraneous factors. (Note: During 2008, despite inflation in the Kingdom reaching 11 percent, the SAG remained firmly committed to the dollar peg, both in policy actions and in public comments. Since then, the central bank governor and other officials have been unequivocal in their support for the dollar peg. End note.) FINANCIAL SECTOR EXPOSED TO CRISIS -------------- ¶5. (C) Although he initially told us the banks in Saudi RIYADH 00000788 002 OF 002 Arabia are not heavily exposed to the international financial crisis, Sfakianakis later caveated this by saying they are largely controlled by five powerful families, and that these families are exposed, particularly to the collapse of the real estate bubble in Dubai. This point was recently driven home when three major family-controlled companies (Saad Group, Ahmad Hamad Al-Gosaibi and Brothers, and Al-Tuwairqi Group) each defaulted on debts of more than $1 billion. In the past two weeks, three Gulf central banks have taken significant action against these groups, including freezing the assets of the Saad Group in Saudi Arabia and asking banks in the UAE to cut ties with both the Saad Group and the Gosaibis. DECISION ON GCC CENTRAL BANK WAS EGO-DRIVEN -------------- ¶6. (C) Saudi egos account for 90 percent of the decision to locate the Gulf Cooperation Council's monetary council in Riyadh instead of the UAE, according to Sfakianakis. In addition, Saudi decision-makers were unhappy with the Emiratis' claim to a sound banking system. The Saudis see the UAE as "the capital" of global money laundering in the region, with the government maintaining little real control over financial transactions. See reftel for additional reporting on this topic. OIL PRICE IS OFF TO THE RACES -------------- ¶7. (C) In recent public comments, Saudi Minister for Petroleum and Mineral Resources Ali Al-Naimi expressed hope that oil would reach what the Saudis feel is a fair price ($75-80/barrel) by the end of 2009 and predicted oil could hit $150/barrel within three years. Sfakianakis echoed these remarks, saying it is even "conceivable" that oil could exceed $300/barrel in the next few years. DRAIN ON FOREIGN ASSETS NOT DIRE -------------- ¶8. (C/NF) Though the Saudis have been drawing down their foreign assets by several billion dollars per month since February to inject into their domestic economy, Sfakianakis said the central bank's actual assets exceed those reported publicly by around $70 billion. He said these additional assets are not disclosed for "national security reasons." ERDMAN