The Global Financial Crisis: Economic Impact on GCC Countries and Policy Implications

Introduction The global financial crisis has emerged in September 2008 with the breakdown of several large United States financial firms and spread rapidly leading to a global downturn of uncertain severity and duration. The highly leveraged U.S financial institutions, with a huge sum of toxic assets in terms of mortgage backed securities and debt insurance investment (derivatives) like credit default swaps, faced a credit crisis which led to their insolvency (Kamara Abdul and Vencatachellum, 2009). The impact of the financial sector failure on activities of the real economic sectors has become increasingly evident, propagating beyond its initial epicenters to affect other advanced economies, emerging markets, and the Arab rich GCC countries. This paper intends to analyze the impact of the global financial crisis on GCC countries. It attempts to provide an overview of the possible impact of the crisis on the short-term macroeconomic outlook. To evaluate the magnitude of the effects, this paper provides some comparison between the 2009 projections with those made before the crisis. Additionally, estimations illustrate some downside risks to these projections. While for many GCC the effects of the crisis have been mild compared to the rest of the world, its eventual impact may be severe, if the appropriate macro fiscal and monetary policies are not properly implemented. Many GCC countries have made great strides in strengthening their policy frameworks and robustness to shocks, stimulating healthy economic growth, improving current account balance, foreign reserve, sovereign wealth fund and the financial systems. But many remain highly vulnerable to a deep global downturn that is so closely linked to oil price shocks (World Bank, 2008). GCC financial market linkages to the reset of the world are considered strong, and a secondround effects of the economic slowdown on the financial system could be particularly severe. Without additional fiscal stimulus, the prospect for fast recovery may be limited for most GCC countries due to binding financing constraints and fragile debt positions for some financial institutions, utility and real- estate companies, especially for a city like Dubai (UAE).This could both deepen and prolong the crisis in GCC countries, and set back the aggressive growth agenda. Against this background, this paper provides policy advice on how best to address the impact of the crisis on GCC countries and describes appropriate fiscal and monetary policies to be adopted.GCC governments should design policies to support growth and mitigate risks to the financial system. In addition, GCC countries should deploy its own macro and micro financing facilities to help small and medium size business , the real-estate sector, bank operations and industrial sectors, while making efforts to sustain and catalyze additional resources , if needed , from their sovereign wealth fund and government bond issues. The paper is organized as follows. Section II reviews the global outlook for economic growth and commodity prices. Section III provides an overview of the pre crisis economic projections for GCC, while Section IV provides the impact of the global crisis on GCC countries. Section V analyzes the fiscal, liquidity and debt management implications of the crisis. Section VI provides outlook for GCC countries for 2009.Section VII provide limitations of the study, Sections VIII and VIIII provide policy implications and conclusion.download