The global financial crises that erupted in 2008 affected all countries, rich and poor, to varying degrees, worldwide (Iqbal 2008). Financial markets around the world became more volatile and the economic slowdown created a ripple effect beginning with the United States and Europe into several more economically integrated countries (Nabibi 2009). In a short span of time, severe economic losses were reported by banks, real estate, and equity markets. Blackstone chief executive officer (CEO) Steve Schwarzman stated in the Davos World Economic Forum that the global economic meltdown destroyed 40 percent of the world’s wealth (Conway 2009).
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The crisis began in September 2007 and concentrated in US real estate – termed as the “subprime crisis” and eventually developed into what economists called the “credit crunch” in 2008 (Nabibi 2009). As American and European banks incurred losses because of exposure to sub-prime assets, their capital was reduced and affected their capacity to lend. Moreover, corporate and household borrowers began to deleverage (Al Maraj 2008). As major financial institutions went bankrupt and household wealth eroded, investor and consumer confidence went down significantly (Woertz 2008). Quick policy responses from governments of the West was able to prevent their economies from plummeting into depression, but the U.S. experienced one of its worst recessions since the Second World War (United Nations 2009a). While economists have said that no country was spared as a result of the global financial crisis, the effects were disparate among different economies. For instance, the more severe losses were experienced by highly integrated economies and had minimal impact on Arab economies which are less integrated (Behrendt, Haq and Kamel 2009). However, the global economic slowdown also resulted to the decline in demand for oil, which claims a significant chunk in the exports of countries composing the Gulf Cooperation Council or GCC (Nabibi 2009). The initial impact of the crisis was the sudden plunge of oil prices, coupled with the depletion of half of local stock markets by half, and the loss of value of investments in the global market. The decrease in oil prices affected the oil-exporting GCC countries which are also the most globalized in the region (Fakir 2009). The domino effect came later – unemployment, decline in remittances, reduced government income, reduced trade and investment and reduced social service allocations (United Nations Development Programme [UNDP] 2010). On the other hand, GCC decision makers and finance ministers have reiterated that strict monetary oversight has shielded their economies from the worst effects of the global crisis (Tzannatos 2009). The finance ministers stated that the abundant liquidity is enough to assuage investor concerns and highlight the stability of the monetary system of the GCC (Al Jazeera 2008).
Nevertheless, these effects cannot be generalized for all the GCC countries given their diversity (Nabibi 2009). Countries that are more exposed to global capital, investment and consumption demand face a greater risk of being affected by the crisis than others. For instance, Dubai in the UAE, which depend heavily on international capital, tourism and real estate, seems to be more adversely affected than other countries. On the other hand, Saudi Arabia, which has only 25 per cent foreign workers compared to much higher proportions in the other GCC economies might be much less affected than others (Rajan and Narayana 2009). The crisis seems to have visibly hit the GCC economies in the beginning of 2009. However, both the depth and intensity of crisis and the possibility of turnaround are not clear.
This paper examines the impact of the global financial crisis on the six countries who are members of the Gulf Cooperation Council (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).
2 Objectives
This study seeks to:
1. Assess the impact of the recession on key industries in the GCC economies;
2. Assess the impact of the recession on employment and other social services;
3. Identify the measures undertaken by various stakeholders to mitigate the adverse effects.
3 Topic Area
The central topic of this study is the 2008 global financial crisis, which is one of the most significant economic phenomena that caused turmoil in countries all over the world. To some economists, it demonstrated the volatility and instability of increasingly integrated economies under a globalized world. As many have observed, the countries which were greatest hit by the crisis were those which were highly globalized (Nabibi 2009).
The implications of the crisis for the GCC are significant. In the Arab region, GCC countries are the most globalized, so logically, the erosion of corporate wealth in the US and Europe would have an accompanying impact on the GCC economies. Indeed, as the World Bank (2009) and the International Labour Organization (ILO) studies have shown, stock markets in all of the GCC countries experienced a significant decline because of the withdrawal of investment from foreign financial institutions. Moreover, privately-funded and domestic projects have been cancelled or abandoned, resulting to a great number of people being laid off and without jobs (Tzannatos 2009; Rajan and Narayana 2009). Despite pronouncements from government decision makers, the effects of the downturn on GCC economies seemed evident (Woertz 2008). Many organizations such as the World Bank and the ILO conducted impact assessments to determine the effect of the financial crisis on trade and industry in the GCC (Iqbal 2008). Understanding how it impacts the GCC economies and determining the effectiveness of the policy responses by governments shed light on how best to strengthen economies to mitigate the effects of the global financial crisis. After all, it seems certain that the global financial crisis of 2008 was not the first to its kind and will not be the last.
4 Literature Review
Studies and statistics assessing the impact of the global financial crisis on Arab countries have mixed results. Some have stated that the impact, while present, has been minimal (Behrendt, Haq, and Kamel 2009; Khamis 2010) while others have hypothesized of a more lingering adverse impact for oil-exporting economies such as those in the GCC (Nabibi 2009; Bloomberg 2010).
The initial pathway for the effects of the crisis to become transmitted into the GCC was its financial markets. It began with the regional stock markets characterized by high volatility. Financial institutions as well as real estate developers, which comprise among the largely publicly-listed corporations in the GCC were adversely affected, especially Dubai (Nabibi 2009). Moreover, due to real estate speculation’s effect of increasing defaults on mortgages, many commercial banks in the Middle East region were hurt. Despite having a limited exposure to the global financial markets, banks in GCC countries maintained large investments and loaned very large sums to private entities for the purpose of investment (Center for Strategic Research 2009). As stock prices plummeted, several banks experienced massive default loans and loss of asset values (Khamis 2010). Although the banking sector experienced shock waves, the Islamic banks on the other hand were insulated (Iqbal 2008). Because they are protected from “toxic” financial assets and prohibit speculation, the first impact of the global financial crisis shielded them. In addition, sovereign wealth funds (SWFs) also suffered heavy losses as a result of the global financial crisis. The heavier losses were recorded by those which have significant investments in the US stock market, financial institutions, insurance companies, and banks. Estimates put losses at over 200b USD for the year 2008 alone (United Nations 2009b).
Aside from the financial sector, the effects of the global financial crisis have also impacted the real economy (Woertz 2008). In real estate, projects which are ongoing or are in the planning stage are likely to be suspended because of financial squeeze. Financing for large construction projects will not be so feasible. This is why one of the largest-hit of the global financial crisis is Dubai where the real estate sector is heavily dependent on speculation and debt financing (Rajan and Narayana 2010). Revenue generation among countries has also generally decreased. Figures from the ILO in 2009 reveal that real GDP growth has shrunk from 6 percent in 2007 to 4 percent in 2009. There is great indication that the crisis will have a more sustainable effect on the region within the years to come. Moreover, due to high inflation, increasing national debt, and prolonged volatility of markets will render more GCC countries vulnerable to the economic slowdown (Center for Strategic Research 2009).
Analysts have been keen to point out that the significant drop of oil prices and demand for oil will be the biggest obstacle for the GCC economies. From a barrel price of 140USD in July 2008, oil prices have dropped to merely 40USD per barrel in January 2009. This significant drop increases the threat of negative fiscal balances for Oman, Bahrain and Saudi Arabia due to losses in oil revenue. Hence, the projected growth among GCC countries may be set back a few years more because of downward trend of oil prices (Behrendt, Haq, and Kamel 2009). The slowdown of the European economy may also force GCC countries to reduce production, which will eventually lead to further decline of real GDP in oil-exporting countries (Bloomberg 2010). Saudi Arabia was also severely hit, with its GDP down from 4.2 percent in 2008 to 0.7 percent in 2009 (United Nations 2010a, p. 74).Moreover, without sound governance, the current practice of oil-exporting countries of maintaining high fiscal spending despite declining oil revenues will further hamper growth (Nabibi 2009).
Analysis and predictions over the impact of the global financial crisis on the GCC economies are mixed. While they unanimously state that the global crisis has had an adverse effect on GCC countries, some have stated that the impact is negligible (Khamis 2010) and is not adverse enough to threaten the stability of the region. Behrendt, Haq, and Kamel (2009) opined that the GCC economies are in a relatively well position and can ably cope with the challenges of the global economic turmoil because of many reasons. Firstly, the GCC region has abundant liquidity from incomes out of high commodity prices. Secondly, sound economic management has enabled GCC economies to weather the economic slowdown quite well. Thirdly, the economies of GCC countries are weakly integrated to the global economy as compared to other regions. Smith (2008) said that while there have been negative effects experienced by GCC economies, they are manageable compared to what has been suffered by other countries.
The effects of the global financial crisis have also been diverse in degree. For instance, the Oxford Business Group (2009) opined that by and large, the banking sector in Saudi Arabia has demonstrated a high degree of resilience and was insulated from the problems which confronted commercial banks in other GCC countries. Moreover, the Saudi economy in general was found to “better than other countries to avoid any negative impact” (p. 61) on the following grounds. First, Saudi’s banks have focused on domestic demand, thereby keeping exposure to the US subprime assets at arm’s length. Second, Saudi’s mortgage industry is relatively underdeveloped, and therefore a minimal impact on its real estate sector was experienced in comparison to other GCC countries. Thirdly, the sector still maintains a large and underbanked deposit base to draw from (Oxford Business Group 2009).
Among the GCC economies, the UAE has been the most affected by the crisis. Between 2008 and 2009, real GDP growth fell from 7.4 to 0.5 percent. This was due to a severe contraction in domestic demand, notably in Dubai. In the UAE, the real estate sector represents 16 percent of GDP, so the slowdown in this sector had a severe impact on growth. Around 80 percent of Dubai’s workforce is composed of expatriates, and due to the layoffs, consumption has been significantly reduced (United Nations 2010a, p. 73).
GCC economies responded to the effects of the global crisis by adopting measures and policies to mitigate its adverse consequences. Most GCC countries reproduced the policy responses of Western governments such as fiscal stimulation and stricter financial guidelines and regulations. The responses varied relatively depending on the circumstances of their economy. As the first impact of the global crisis directly hit financial institutions and the stock markets, GCC countries’ first policy responses was directed at supporting the banking sector by providing liquidity and credit support. Oil exporters such as Saudi Arabia, Kuwait, and the UAE fortified their banking systems by providing deposit guarantees for commercial banks (Woertz 2008).
The effects of the global financial crisis on the banking sector have been buffered by several policy measures undertaken by GCC governments and their central banks. Some of the key measures taken since early September 2008 are as follows: reducing the Repo rate four-fold from 5.5 to 2.5 percent, reducing capital reserve requirement for banks, and injecting 3bUSD to enhance liquidity (Saudi Arabia); reducing Repo benchmark to 1.5 percent, injecting 32b USD in the financial and banking sector to ensure liquidity (UAE); reducing discount rates by 50 percent and guaranteeing of deposits (Kuwait) (Iqbal 2008).
5 Research Questions
The central question which this study answers is:
What is the impact of the global financial crisis on the GCC countries?
The following sub-questions will also be addressed, to wit:
1. What effect did the global financial crisis have on the financial markets, export demand, and government revenue in GCC countries?
2. How did the global financial crisis affect social indicators such as poverty and unemployment in GCC Countries?
3. What policy responses were made by GCC countries to counter the effects of the financial crisis?
Research Hypotheses
1. The global financial crisis had a negative impact on the financial markets, export demand, assets, tourism, and remittances in the GCC countries. The impact of the crisis however went at varying degrees across countries.
2. The crisis led to an increase in unemployment and to the decrease of budget allocation for social services.
6 Methodology
Overview of approach
This study follows a mixed-methods approach combining qualitative and quantitative methods of data collection and data analysis in order to achieve its goals. Because this study wants to determine the impact of the global financial countries on the economies of the GCC countries, the use of statistics is indispensable. Hence, the use of statistical evidence and the analysis of statistical data will form the bulk of the quantitative aspect of this study. The use of quantitative methods will provide generalization and predictions which are important to this study. On the other hand, there is a need to give the study a more in-depth character in order to fully understand the impact of the global financial crisis in its own context (Strauss and Corbin 2003). It is assumed that statistical research may not be able to take into full account the effects of the financial crisis. In order to have the best of both paradigms, qualitative and quantitative approaches are combined in this research in order to provide insights that neither approaches alone can provide (Patton 2005).
Data Collection
Qualitative and quantitative forms of data will be gathered for the purposes of this study.
1. Key informant interviews
Key informant interviews are qualitative in-depth interviews with individuals who are knowledgeable about the topic of interest. The purpose of conducting key informant interviews is to gain access to information which people who have first-hand knowledge only possess. In the context of the research objectives already outlined, key informant interviews can provide information about how the global financial crisis has affected GCC countries from a limited number of economic analysis or experts who have been able to observe and track the consequences of the global financial crisis in their respective countries.
In particular, five (5) key informant interviews will be conducted. Participants will be individuals who are highly qualified to provide information about the effects of the global economic crisis: professors, economic analysts, or business experts. Face-to-face interviews or Internet correspondence will be conducted. Interviews will be transcribed and interpreted accordingly.
2. Statistical reports and other documentary evidence
As stated earlier, the use of statistical data is indispensable to this study. To track the effects of the global financial crisis on key areas of the six GCC economies, official reports and statistics from authoritative sources will be used such as the World Bank, International Labor Organization, the OECD, and International Monetary Fund.
Moreover, secondary sources such as newspaper articles, in-house reports, and other pertinent documents will be used to verify or illuminate findings.
Data Analysis
Data from the key informant interviews will be analyzed for recurring themes, patterns, and ideas. Statistical data from reports and documentary evidence will be analyzed using descriptive statistics.
Interpretation
Because qualitative data tends to be subjective, findings from the key informant interviews will be cross-checked and verified with secondary sources. In order to reduce the probability of bias, results from the interviews will be substantiated with findings from statistical analysis performed on the reports and documentary evidence.
7 Expected Results
Out of the mixed-methods approach that this study will undertake in determining the impact of the global financial crisis, the following results are expected:
1. A detailed presentation of the key economic and social indicators in significant areas of six GCC countries highlighting improvement or decline;
2. An in-depth presentation of interview findings from well-known and expert informants that will substantiate or illuminate on the findings from statistical sources.
3. Key policy responses made by governments are identified and recommendations for improvement are also outlined.
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