D/S Wolin Discusses Global Recovery with UAE Officials

S E C R E T ABU DHABI 000105

SIPDIS
NOFORN

E.O. 12958: DECL: 2035/02/25
TAGS: PGOV PREL PTER EFIN AF AE IR
SUBJECT: D/S Wolin Discusses Global Recovery with UAE Officials

CLASSIFIED BY: Richard G. Olson, Ambassador, State Department, U.S.
Embassy Abu Dhabi; REASON: 1.4(B),(D)

TREASURY FOR WOLIN, LEVEY, COHEN, BAUKOL, MENDELSOHN, MUNDACA

STATE FOR EEB, AND NEA/ARP

COMMERCE FOR LOCKE

USTR FOR KIRK




1. (U) Summary. On 15-16 February 2010, Treasury Deputy Secretary
Neal Wolin met with UAE officials to review progress in the global
economic recovery. UAE officials expressed approval of U.S.
measures to restore global growth and stressed the resilience of
the UAE's economy in navigating Dubai's debt woes. Wolin met with
Foreign Minister Sheikh Abdullah bin Zayed al Nahyan, Abu Dhabi
Investment Authority (ADIA) Managing Director Sheikh Ahmed bin
Zayed al Nahyan, Minister of State for Financial Affairs Obaid al
Tayer, Minister of Foreign Trade Sheikha Lubna al Qasimi, Minister
of Cabinet Affairs Mohammed al Gergawi, Central Bank Governor
Sultan bin Nasser al Suweidi, Abu Dhabi Investment Council (ADIC)
Managing Director Khalifa al Kindi, and Ahmed al Tayer, who serves
as Governor of the Dubai International Financial Centre (DIFC) and
Chairman of Emirates - National Bank of Dubai (E-NBD).




2. (U) Wolin engaged in outreach events connecting with young Arab
leaders, entrepreneurs and students, hosted by Abu Dhabi's Tawteen
initiative (preparing young Emirati nationals for private sector
employment) and the Dubai School of Government. He also attended a
lunch hosted by Dubai Supreme Fiscal Debt Committee Chairman Sheikh
Ahmed bin Saeed al Maktoum, who was joined by 14 top economic
decision makers from UAE, Abu Dhabi and Dubai government entities.
End Summary.



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ECONOMIC RECOVERY

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3. (C) Wolin provided an overview of relevant economic data
indicating that the U.S. economic recovery is on firmer ground, but
much work remains ahead. He discussed U.S. GDP growth,
unemployment, investment, fiscal stimulus, taxes, mortgage markets,
trade, deficits, labor productivity, bank capitalization and
financial sector reform. With respect to Dubai's debt
restructuring, Wolin urged the UAE be transparent,
non-discriminatory with lenders, and try to manage through the
crisis as quickly as possible in the interest of the UAE economy
and international capital markets. Wolin stressed the value placed
on the U.S.-UAE partnership, and emphasized the deep importance of
UAE strength to the U.S. Government.




4. (S/NF) UAE officials praised U.S. measures to stabilize the
global economy. Governor Suweidi stated that the stimulus package
"did miracles" and helped change the direction of the global
economy. He said the engineers of the package should be thanked. He
also pointed to measures implemented by the UAE government to
promote growth and stabilize the banking sector. Suweidi agreed
that difficult issues will still arise, but speculated that the
most difficult period is in the past. He reaffirmed the UAE's
intent to retain the dirham-dollar peg and saw no need for a
revaluation.




5. (S/NF) Suweidi reviewed overinvestment in the UAE's real estate
sector and the resulting impact on the UAE banking sector. He said
banks will lose money, but that there is no issue of insolvency,
pointing to high capitalization rates and the UAE's strong fiscal
position. The Governor expects Dubai's economy to suffer for 10-12
years as it absorbs excess capacity. He expects haircuts on Dubai
World related debts, but did not offer possible numbers. He
acknowledged that certain UAE banks may need additional
governmental support, depending on the outcome of the restructuring

talks.




6. (S/NF) ADIC MD Khalifa al Kindi described the excessive and
rapid growth of UAE banks - pointing out that from 2003-2008, the
UAE banking sector witnessed balance sheet growth greater than
experienced for the entire preceding 30 years. He described
property values in Dubai and Abu Dhabi today as significantly
overvalued, even though 40-70% declines have already been marked.
He mentioned a 2008 report by Jones Lang LaSalle that recorded real
estate prices in Dubai trading at a 30% premium to Manhattan, where
Khalifa al Kindi believed a 50% discount made economic sense.




7. (S/NF) Khalifa al Kindi noted varying degrees of transparency
and accounting integrity at UAE banks in light of needed write
downs and NPLs stemming from exposure to Dubai debt, disgraced
Saudi conglomerates Saad/Gosaibi, UAE real estate more broadly, and
overstretched UAE consumers. With regard to rumored haircuts on
Dubai World related debt, Khalifa retorted that haircuts of any
significant size would entirely wipe out the capital of a few UAE
banks, and substantially damage others. If such haircuts are in
fact imposed, he expects both local and international banks to sue.
He found it unexplainable that with current financial conditions,
certain UAE banks continued recording profits and paying healthy
dividends, when they should instead be conserving capital, taking
provisions and recognizing losses.




8. (S/NF) Minister of State for Financial Affairs Obaid al Tayer
speculated that UAE economic recovery would lag the U.S. by 9
months. He projected growth in the UAE to be 1.5 - 2.5% in 2010, 4
- 5% for 2011-2014, and then 5 - 7% after 2014. He said Dubai
infrastructure is already built, and that no more is needed
following years of heavy investment in ports, roads, hotels,
housing, transportation, etc.




9. (S/NF) Obaid al Tayer commended UAE government steps to support
the banking sector and noted exceptionally high capital adequacy
ratios averaging 19.9%. He said UAE banks are well positioned for
further provisioning and NPLs, but added that if one or two banks
are hurt by the Dubai World restructuring "between the Central
Bank, Ministry of Finance and federal government, we are going to
take care of the banks...we will support them." He speculated that
2010 will be the bottom year for UAE banking sector performance.




10. (S/NF) On the Dubai World restructuring, Obaid al Tayer stated
that the Dubai Fiscal Support Fund will be talking to banks over
the next 2-3 weeks, hopefully adding clarity to the situation. He
agreed with Wolin's call for transparency, insisting that
transparency is essential if the UAE is going to be a global
player. He admitted that the UAE is late in conforming to IMF data
transparency guidelines (the GDDS),adding "we can't get there
overnight, but we are headed there and taking the right steps." He
declined to comment on market rumors floating possibilities of a
40% haircut, but suggested that some circles may be "testing the
market."




11. (S/NF) Obaid al Tayer said the UAE is trying to implement
faster decision making processes. He said Abu Dhabi is already
setting up a debt management office and the federal government is
working with the World Bank on a federal debt management office,
with a formal law on the subject hopefully no more than 2-3 months
away. He shared that other less advanced Emirates didn't even have
budgets, raising further obstacles to transparency.




12. (C) Minister of Cabinet Affairs Mohammed al Gergawi expressed
confidence that Dubai will remain the business capital for the
Middle East despite the current debt situation: "the world has
changed, and Dubai will change." He stressed that Dubai is a city
within a country and praised the strength of the UAE's federal
system - a key refrain acknowledging financial support from Abu

Dhabi. He acknowledged that Dubai took risks, but pointed to
Dubai's newly built infrastructure and other acquired assets that
can be sold or otherwise monetized. He said that outside of Dubai
World, other Dubai government related entities (GREs) would not
have problems with their debt, assuming that the global recovery is
not derailed.




13. (C) Gergawi emphasized the strategic importance of Dubai to
the MENA region and to the United States. He held out Dubai as an
important model pushing the rest of the region to open their
economies and liberalize their societies. He ticked off the values
embodied in UAE and Dubai society, including tolerance,
entrepreneurship, and middle class upward mobility similar to the
American dream. Dubai and the UAE give young Arabs a path, a place
to exchange ideas and meet people. Gergawi pointed to Dubai's
efforts to build a moderate media outlet in the Middle East that
serves to promote American values and interests. He shared a
personal story, admitting that he was anti-U.S. in high school,
until he spent time in the U.S. as a student and developed personal
bonds with Americans, including an English teacher that was Jewish.
He said on a recent visit to New York, he took his kids to a Jewish
synagogue led by a Syrian rabbi.




14. (C) Commenting on Dubai's crisis, DIFC Governor Ahmed al Tayer
bluntly stated, "thank god for support from Abu Dhabi and the
federal government." He said some sectors are showing signs of
growth and stability, such as tourism , logistics, trade and
aviation, but real estate remained deeply troubled, citing the
embattled mortgage finance firms Amlak and Tamweel that got caught
with an asset liability mismatch. He said Dubai now has sufficient
infrastructure to power growth for 30 years. On the Dubai World
restructuring, he confirmed that the UAE would not discriminate
between local and overseas lenders, unlike the Saudi resolution of
the Saad/Gosaibi blow up. He touted the DIFC as a platform needed
to serve the region, and noted increased interest and activity
coming from India and Russia in particular.



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SWFs

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15. (C) Wolin thanked ADIA for its support of the U.S. and its
confidence in the U.S. economy. He reiterated the strong
partnership that exists between the U.S. and the UAE on a variety
of political, economic and strategic issues, and the important
cooperation between ADIA and the Treasury Department on open
investment policies. ADIA MD Sheikh Ahmed echoed the strategic
nature of the political-economic relationship between the U.S. and
the UAE.




16. (S) Sheikh Ahmed confirmed that 45% of ADIA's investments are
U.S. based and described the U.S. as the most important market for
investment, adding there is "no other choice." He expressed
confidence that the U.S. is doing better than other countries in
dealing with its problems and asked when the U.S. economy would no
longer rely on government spending. ADIA officials asked about the
role of investment v. consumption in sustaining growth in the U.S,
the status of U.S. financial sector regulatory reform, and the
forecasts for distress in U.S. commercial real estate debt.




17. (C) Sheikh Ahmed noted that ADIA pays close attention to
political issues when deciding where to invest. He described Iran's
destabilizing role in the region, adding that neighbors should
support, not threaten, one another.




18. (C) ADIC MD Khalifa al Kindi asked Wolin about ADIC's inquiry
regarding its status under Section 892 of the Internal Revenue

Code. Khalifa raised the visit of ADIC officials to Washington in
October 2009 and a January 2010 letter addressed to Acting
Assistant Secretary Michael Mundaca. Wolin stated that Treasury was
currently reviewing the January letter and pledged to personally
keep abreast of the issue to ensure that ADIC receives a timely
response.




19. (C) ADIC officials peppered Wolin with questions regarding
financial sector reform and the so called "Volcker Rule." Wolin
detailed the purpose, scope and procedural issues pertaining to
financial sector reform and the Volcker Rule. ADIC asked about the
mechanics of restricting proprietary trading by bank holding
companies, and in particular the possible impact on bank holding
companies that finance, sponsor or serve as a general partners in
hedge funds. ADIC asked about Treasury's overall views on hedge
funds and their status as "dark pools" of capital. ADIC also asked
about reforms that would address rating agencies in light of their
involvement in birthing the financial crisis.




20. (C) ADIC asked about the current administration's views on
SWFs, to which Wolin responded that the U.S. welcomes all foreign
investment.



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TRADE

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21. (C) Wolin affirmed the USG commitment to open investment
policies and emphasized that the CFIUS process is concerned solely
with issues of national security. Minister of Foreign Trade Sheikha
Lubna stated that U.S. leadership in the world economy remains
paramount as the U.S. remains "the compass." She acknowledged the
need for the U.S. to be more inward focused during this period of
economic recovery, but stated that this situation can create
anxiety as the trade policy part of the U.S. has gone silent. U.S.
visibility on this front is very important to protect and promote
global trade. Lubna pointed to very positive visits to the UAE by
Secretary Geithner and various congressional delegations, and
pleaded for similar trade-oriented visits by Commerce Secretary
Locke and USTR Kirk. Lubna stressed opportunities in the knowledge
and services sectors, including health care, education, renewable
energy and nuclear.




22. (C) Lubna pointed to high level trade visits between the UAE
and China, Japan, South Korea and India, with UAE-India trade now
reaching $48 billion annually. Wolin concurred with Lubna's
assessment on the importance of government supporting trade
relations and offered to discuss the issue with the Department of
Commerce and USTR.




23. (C) Wolin raised the Doha round and encouraged the UAE to relax
foreign ownership controls in its financial services sector. Lubna
suggested that the U.S. and UAE start an informal working group to
identify easy and tough points surrounding the issue. Wolin
concurred and offered Treasury DAS Baukol to coordinate the
Treasury side; Lubna nominated her deputy Abdullah Saleh.




24. (C) With respect to a Free Trade Agreement (FTA),Lubna
mentioned show stoppers including energy and companies law. She
commented that returning to the table and failing to conclude an
FTA would send a bad signal. Instead, Lubna recommended trying to
make progress on issues where common ground can be reached so that
successes can be exemplified. Lubna expressed confidence much
progress could be achieved without pursuing an FTA and recommended
the U.S. and the UAE establish a Joint Economic Committee similar
to the one the UAE holds with the UK that would focus initially on
services and IPR. Lubna suggested combining the Committee with the

U.S.-UAE Business Council.



This cable has been cleared by Treasury.
OLSON