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

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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