Front Matter Page

Middle East and Central Asia Department

Front Matter Page

©2010 International Monetary Fund

Production: IMF Multimedia Services Division

Cataloging-in-Publication Data

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.

• p.; cm.

• Includes bibliographical references.

• ISBN 978-1-58906-971-8

• 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.

HB3808.55.I47 2010

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Contents

• Acronyms

• Acknowledgments

• Executive Summary

• I The Run-up to the Crisis: The Boom Years

  • Buoyant Economic Activity, Diversification, and Stronger Fiscal and External Balances

  • Credit and Asset Price Boom

  • Inflationary Pressures and the Peg to the U.S. Dollar

  • A Buildup of Vulnerabilities

• II The Impact of the Global Crisis and Policy Responses

  • Impact of the Crisis

  • A Forceful Response Contained the Impact of the Crisis

  • Taking Stock: What Has the Crisis Revealed?

• III Managing the Crisis and Beyond: Some Policy Recommendations

  • Immediate Measures: Addressing Emerging Financial Sector Challenges

  • Key Medium-Term Reform Priorities

• Annexes

• I Intervention Measures Adopted by GCC Countries

• The Landscape of GCC Financial Systems

• III Islamic Banks in the GCC: How Did They Fare Compared to Conventional Banks?

• Boxes

  • 1 The Consequences of Dubai World’s Debt Developments

  • 2 GCC Financial Flows: Regional and Global Spillovers

  • 3 Cross-Sectoral and Cross-Border Linkages in the GCC

  • 4 Financial Stability Laws

  • 5 GCC: Banking Sector Prudential Measures

  • 6 Developing a Prompt Corrective Action Framework in the GCC

  • A.1 GCC: The Institutional Structure for Financial Sector Regulation and Supervision

• Figures

  • 1 GCC: Oil Prices and Economic Performance (2000–08)

  • 2 GCC: Projects Planned and Under Implementation, End-2008

  • 3 GCC: Economic Diversification, 1990–2008

  • 4 GCC: Gross Official Reserves, 2000–08

  • 5 GCC: Average Annual Real Growth in Credit to the Private Sector, 2003–08

  • 6 GCC: Economic Activity, Money, and Credit, 2000–08

  • 7 GCC: Trends in Private Sector Credit, 1992–2008

  • 8 U.S. Dollar Movements and GCC Inflation

  • 9 GCC: Real Effective Exchange Rate Indices

  • 10 GCC: Share of Credit to Real Estate and Construction Sectors, 2002 and 2008

  • 11 GCC: Foreign Liabilities to Total Liabilities, 2003–08

  • 12 GCC: Capital Adequacy Ratios

  • 13 Credit Growth and Capital Adequacy Ratios in Selected Emerging Countries

  • 14 GCC: Debt-to-Equity Ratios for Listed Companies

  • 15 GCC: Credit Default Swap Spreads on Five-Year Sovereign Debt, Mar. 2008–Jan. 7, 2010

  • 16 GCC: Equity Market Indices, March 2008–January 7, 2010

  • 17 GCC: Stress Indicators, March 2008–December 2009

  • 18 GCC: Current Sovereign Short-Term Ratings and Maximum CDS Spreads, Since Mar. 2008

  • 19 GCC: Commercial Banks’ Reserves with Central Bank, December 2007=100

  • 20 GCC: Three-Month Interbank Rates, January 2007–November 2009

  • 21 GCC: One-Year Currency Forward Premiums, January 2008–January 2010

  • 22 GCC: Banks’ External Financing, December 2003—September 2009

  • 23 GCC: Credit to the Private Sector, January 2008—December 2009

  • 24 GCC: External Financing of Nonbanks, December 2003—September 2009

  • 25 GCC: Projects On Hold, End-2009

  • 26 GCC: Recent Inflation Dynamics

  • 27 GCC: Non-oil Fiscal Balance

  • 28 GCC: Banking Sector Profitability

  • 29 GCC: Selected Macroeconomic Indicators, 2008—10

  • 30 GCC: Oil GDP, 2000–08

  • 31 GCC: Oil Revenue

  • A.1 GCC: Total Banking Assets, 2008

  • A.2 GCC: Market Share of Islamic Banks, 2008

  • A.3 GCC: Real Growth of Credit to the Private Sector, 2006—08

  • A.4 Private Sector Lending, Dec. 2008

  • A.5 MENA: Stock Market Capitalization, December 2009

• Tables

  • 1 GCC: Average Annual Real GDP Growth, 1991—2008

  • 2 GCC: Selected Economic Indicators for 2008

  • 3 Government Debt, Official Reserves, and External Current Account Balances

  • 4 Correlation in Stock Markets

  • 5 GCC Policy Response to the Global Crisis

  • 6 Banking Sector Performance and Soundness

  • 7 GCC: Banking System Profitability (Listed Banks) 34 A.1 GCC: Ownership Structure of the Domestic

  • A.1 Banking System, End-2007

  • A.2 GCC: Share of Sukuk in GCC Debt Markets, Mid-2009

  • A.3 GCC: Selected Prudential Regulations

  • A.4 Market Share and Average Annual Asset Growth of Islamic and Conventional Banks in Selected Countries

  • A.5 GCC: Selected Indicators for GCC Islamic Banks and the Banking System

Acronyms

Acknowledgments

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.

Executive Summary

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.