Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead: An Update

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The GCC countries performed well during the 2003-08 oil boom, but the boom also presented challenges. Buoyant economic activity, rising consumer and investor confidence, and abundant liquidity spurred excessive credit growth, inflation, and asset price increases. In addition, 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 vulnerability in the event of a slowdown in economic growth and a decline in asset prices. In the corporate sector, the boom was associated with higher leverage, which increased the sector's vulnerability to the availablitity and cost of financing. As the global economic crisis took hold, the GCC countries were affected through trade and financial channels. By the second half of 2008, GCC government finances and external positions were directly affected by the decline in oil prices and demand. At the same time, GCC countries underwent reversals of speculative capital inflows experienced in 2007 and early 2008. These developments tightened liquidity conditions and affected investor confidence, and were further exacerbated by Lehman's collapse in September 2008 and the ensuing global liquidity shortages and deleveraging. GCC financial sector imbalances came to the fore, especially in the United Arab Emirates (U.A.E.), Kuwait, and Bahrain, given these countries' close linkages with global equity and credit markets. A forceful response by the authorities contained the impact of the crisis. To offset the fallout from the crisis, GCC governments maintained or even increased spending levels despite a sharp decline in oil revenues. In particular, Saudi Arabia adopted the largest fiscal stimulus (as a share of GDP) among the G-20. They also introduced exceptional financial measures, including capital and liquidity injections (Table 1 and Figure 1). In line with monetary easing in the United States in late 2008, and to ease domestic credit conditions, GCC countries (except Qatar) lowered interest rates, and eased liquidity through direct injections in the money market and through statutory changes, including reductions in reserve requirements and relaxation of prudential loan-to-deposit ratios.