US embassy cable - 03ABUDHABI773

S E C R E T SECTION 01 OF 02 ABU DHABI 000773 
 
SIPDIS 
 
NOFORN 
 
STATE FOR NEA/ARP, NEA/RA, E, D, EB AND PMAT 
 
E.O. 12958: DECL: 02/17/13 
TAGS: EFIN, MARR, MOPS, PGOV, TC 
SUBJECT: (S)  UAEG FINANCIALLY OVEREXTENDED 
 
1. (U) CLASSIFIED BY AMBASSADOR MARCELLE M. WAHBA 
FOR REASONS 1.5 (B,D). 
 
SUMMARY AND COMMENT 
------------------- 
 
2. (S/NF)  Senior UAEG officials have told the 
Ambassador on several occasions recently that the 
UAE is facing serious cash-flow problems.  The 
basic problem is that the UAE has traditionally 
funded its fiscal deficits (which can be as much as 
15 percent of GDP) out of income received from 
large overseas investments.  In some years (such as 
1996) the return on those investments exceeded 
income from oil.  But with the UAE's overseas 
investments realizing negative real returns 
(authoritative sources say post-9/11 governmental 
portfolio investment losses ran as high as 30-40 
billion usd), the UAE is having to tighten its 
belt.  Unfortunately, controlling spending is 
proving quite difficult.  Expenditures, 
particularly on social services (health, 
education), is increasing as a function of a 
growing population and higher citizen expectations. 
At the same time, assistance commitments to worthy 
causes (Pakistan, Jordan, Afghanistan, etc.) 
continue to mount and senior shaykh spending on 
prestige projects (Shaykh Sultan bin Zayid's Lulu 
Island project, the new GCC conference and resort 
center, etc.) are proving hard to switch off.  We 
have heard the same concerns regarding cash-flow 
across all levels of UAE officialdom, leading us to 
conclude that this is not just poor-mouthing in 
advance of an expected U.S. request for financial 
assistance in funding an Iraq contingency.  Our 
requests for future financial assistance from the 
UAE will need to be both judiciously chosen as well 
as particularly well-supported if we are to 
overcome the leadership's prevailing budgetary 
concerns.  END SUMMARY AND COMMENT. 
 
3.  (S/NF)  Beyond the representations by senior 
officials such as de facto Foreign Minister Hamdan 
bin Zayid, there are numerous other signs of a 
fiscal crunch: 
 
--  A senior expat banker says Abu Dhabi's subsidy 
to Dubai has been delayed for several weeks because 
of cash-flow problems; 
 
--  The Finance Department Undersecretary with day- 
to-day responsibility for budget issues says the 
government is seeking to defer non-essential 
projects because of its fiscal overhang; 
 
--  Several senior UAE military personnel have told 
U.S. contractors that money is exceptionally tight 
right now and is expected to remain tight through 
FY 2004; 
 
--  The managing director of the Abu Dhabi 
Investment Authority (ADIA -- the repository of the 
bulk of the UAE's overseas governmental 
investments) told us that his organization has had 
to defer certain requests from the government for 
cash because of an unwillingness to sell off 
depressed equities. 
 
4.  (S/NF)  ADIA and Abu Dhabi Finance Department 
officials note that managing the expectations of 
the leadership with regard to income and rates of 
return has been difficult -- particularly after the 
fantastic returns of the 1990s.  The ADIA managing 
director commented that a real return of 5-6 
percent would be outstanding in the current 
environment, vice returns in the 1990s of 15-20 
percent per annum.  One well-connected banker 
stated that while the UAE still has significant 
assets, the drop in portfolio value combined with 
the cash-flow crunch because of reduced returns has 
created a very real sense of anxiety on the part of 
the UAE leadership -- particularly Abu Dhabi Crown 
Prince Shaykh Khalifa bin Zayed, who controls the 
purse strings and who is in any case not 
particularly noted for his generosity.  The UAEG, 
like most investors, is feeling the pinch, and with 
some observers predicting oil prices likely to drop 
sharply once Iraq's production is fully restored, 
the medium-term outlook for government finances 
here is decidedly bearish. 
 
WAHBA