Middle East and Central Asia Department
©2010 International Monetary Fund
Production: IMF Multimedia Services Division
Impact of the global financial crisis on the Gulf Cooperation Council countries and challenges ahead/prepared by the Middle East and Central Asia Department—Washington, D.C.: International Monetary Fund, 2010.
Includes bibliographical references.
1. Financial crises—Persian Gulf States. 2. Global Financial Crisis, 2008—2009. 3. Finance— Persian Gulf States. 4. Banks and banking—Persian Gulf States. 5. Nonbank financial institutions— Persian Gulf States. 6. Economic forecasting—Persian Gulf States. 7. Economic indicators—Persian Gulf States. I. International Monetary Fund. Middle East and Central Asia Department.
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Arab Banking Corporation
Capital adequacy ratio
Central Bank of Kuwait
Credit default swaps
Dubai International Financial Center
Doha Securities Market
Foreign direct investment
Financial soundness indicator
Gulf Cooperation Council
Government of Dubai
Global Investment Bank
Initial public offering
Middle East and North Africa
Middle East, North Africa, Afghanistan, and Pakistan
Ministry of Commerce and Industry
Memoranda of Understanding
Offshore financial centers
Prompt corrective action
Qatar Central Bank
Qatar Financial Center
Real effective exchange rate
Sovereign wealth funds
United Nations Conference on Trade and Development
The authors are grateful to Masood Ahmed, Director of the Middle East and Central Asia Department (MCD); Juan Carlos Di Tata, Senior Advisor in MCD; and Ratna Sahay, Deputy Director in MCD, for their guidance and comments on several drafts of this paper. We would also like to thank the Gulf Cooperation Council (GCC) country authorities for their useful comments and suggestions.
The authors are also indebted to Serhan Cevik, Joshua Charap, Raphael Espinoza, Gene Leon, Tahsin Sedik, and Oral Williams for their contributions to this publication; Arthur Ribeiro da Silva for excellent research assistance; and Ana Franco for formatting. Special thanks are due to Christine Ebrahimzadeh for her excellent editorial contributions and tireless efforts in the production of this publication. Thanks are also due to Maureen Burke, Marina Primorac, and Joanne Blake of the External Relations Department for their support in the production process.
The opinions expressed in this publication are solely those of the authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the authorities of the countries of the GCC region.
The countries of the Gulf Cooperation Council (GCC) have not been left unscathed by the global financial crisis. But countercyclical policies and financial sector support measures made possible by reserves accumulated during the 2003–08 oil price boom have helped contain its impact. Nevertheless, while the medium-term outlook remains broadly positive, the crisis has revealed some vulnerabilities in the region’s financial markets that need to be addressed to limit future disruptions.
The oil price boom led to large fiscal and external balance surpluses in the GCC countries. But it also generated domestic imbalances that began to unravel with the onset of the global credit squeeze. Buoyant economic activity, rising consumer and investor confidence, and abundant liquidity fueled credit growth, inflation, and asset price increases. In some countries, banks’ growing dependence on foreign financing and exposure to real estate, construction lending and—to a lesser extent—the equity market, contributed to balance sheet vulnerabilities. In the corporate sector, the boom was associated with higher leverage, which increased vulnerabilities to a reduction in the availablitity, and higher costs, of financing.
As the global deleveraging process took hold, and oil prices and production fell, the GCC’s external and fiscal surpluses declined markedly, stock and real estate markets plunged, credit default swap (CDS) spreads on sovereign debt widened, and external funding for the financial and corporate sectors tightened. As a result, of an estimated $2.5 trillion in projects at different stages of planning and implementation at end-2008, around $575 billion had been placed on hold by end-2009. Banks, however, remained profitable despite adverse conditions, and generally showed adequate capacity to absorb potential losses as capital adequacy ratios in most countries were already high going into the crisis.
To offset the shocks brought on by the crisis, governments—buttressed by strong international reserve positions—maintained high levels of spending and introduced exceptional financial measures, including capital and liquidity injections. As part of a five-year $400 billion investment plan, Saudi Arabia passed a stimulus package that is the highest (as a share of GDP) among the G-20. These measures helped sustain growth in the GCC, had positive spillovers for neighboring countries, and contributed to global demand during the global economic downturn.
Looking ahead, while the GCC’s short-term economic outlook may be clouded by recent developments concerning Dubai World, the medium-term outlook for the region remains broadly positive. External funding for nonbanks has generally shown positive signs since early 2009. Non-oil GDP growth is estimated at just below 2.8 percent in 2009, and the rebound in growth in 2010 is expected to be stronger than in advanced economies. Headline inflation is estimated to have fallen from double-digit levels in 2008 to less than 3 percent in 2009. The external and fiscal surpluses have weakened in 2009, but are expected to recover partially in 2010 in line with the expected increase in oil prices. However, developments in Dubai have temporarily disrupted the recovery in regional equity markets and the decline in CDS spreads experienced since early 2009.
The immediate priority is to complete the cleanup of bank balance sheets and the restructuring of the nonbanking sector in some countries. Clear communication by the authorities would help implementation, ease investor uncertainty, and reduce speculation and market volatility.
The banking sector. GCC countries should conduct periodic reviews of banks’ asset quality, in addition to stress testing, to determine whether the level of capital support is sufficient. Where possible, recapitalization should be based on private sector capital injections to minimize moral hazard, and the authorities should reverse public sector injections as soon as market conditions allow it. Specifying rules for bank interventions triggered by objective criteria through a prompt corrective action framework will help ensure that banks address emerging problems quickly.
The nonbank financial sector. The authorities should facilitate the restructuring of nonbank institutions—particularly in Kuwait and the U.A.E.—including by supporting viable entities while ensuring a smooth exit of nonviable institutions. Regulatory and supervisory weaknesses should also be addressed.
Over the medium-term, these measures should be accompanied by improved disclosure; an expanded set of macroprudential tools to support monetary and fiscal policies; and regulatory and supervisory frameworks that focus on ensuring the stability of the financial system as a whole.
Corporate governance and transparency. Improving corporate governance and transparency is a priority, since lenders’ risk aversion has put pressure on GCC conglomerates to enhance disclosure. Encouraging family businesses to go public could help, and there is a need for better corporate governance and transparency in state-owned/affiliated enterprises. GCC countries should also make their banking sectors’ financial soundness indicators available on a timely basis, as delays increase speculation and complicate the market’s ability to conduct a timely analysis.
Excess liquidity and asset price bubbles. To tackle any resumption of speculative inflows, overheating pressures, and asset price inflation, reserve requirements should be used actively and prudential limits on banks strictly enforced. A capital gains tax on property and equity transactions could be considered.
Macroprudential regulation and supervision. A macroprudential approach that focuses on the stability of the financial system as a whole, as well as its links to the macroeconomy, is warranted. Policies should aim to insulate the GCC countries’ financial system as much as possible from the oil cycle. Regulations should promote prudent provisioning—similar to case of Saudi Arabia, which has already been implementing countercyclical provisioning policies—and capital buffers over the business cycle. Excessive corporate sector leverage should be avoided, and spillover risks from offshore financial centers monitored and addressed. Cross-border cooperation should be enhanced and the timeliness and coverage of financial and macroeconomic data improved to enable the authorities to conduct effective surveillance.
Diversification. Ongoing initiatives to diversify financing channels away from banks should be pursued. The development of bond markets will require the governments’ commitment to issue their own securities in a full range of maturities and in a fairly systematic way. Structural reforms aimed at diversifying real sector economic activity should focus on facilitating private sector activity, including by further streamlining business registration procedures and reducing administrative barriers to investment.