Gulf Countries Limit Fallout from Crisis

In a new study on the impact of the crisis on the GCC region, Abdelhak Senhadji and May Khamis of the IMF’s Middle East and Central Asia Department find that region’s policymakers reacted swiftly and appropriately to the crisis. Despite some lingering uncertainties-such as the consequences of the Dubai World debt standstill announcement in November 2009-the study concludes that the effects of the crisis were largely contained.

In an interview, IMF Survey online spoke to Senhadji and Khamis about the region’s lessons from the crisis and why greater financial sector transparency and more rigorous regulation is essential.

IMF Survey online: What was the impact of the crisis on the GCC region?

Senhadji: The GCC countries have been hit by the decline in oil prices and production, as well as by liquidity shortages in global financial markets. Oil market developments affected government finances and external positions directly, but they also had an indirect impact on banking and corporate liquidity and funding costs as speculative capital inflows reversed and investor confidence in the GCC declined. This, together with global liquidity shortages, triggered a steep fall in asset prices and weakened financial systems’ balance sheets, prompting governments’ intervention in the financial sector. The direct impact from U.S. subprime assets, however, was limited, given a relatively low direct exposure of GCC commercial banks to these assets.

IMF Survey online: How effective was the region’s response?

Khamis: The authorities’ swift and comprehensive response definitely dampened the crisis impact. While oil GDP contracted in 2009, non-oil real GDP growth continued to be positive, at around 3 percent compared to 6 percent in 2008. In the financial sector, there were some defaults and losses in the nonbank sector, but these events did not translate into systemic consequences. To a large extent, the measures adopted by the authorities enhanced the sector’s stability and the public’s confidence in it. Banks continued to post profits throughout the crisis, and overall, the impact was moderate.

Senhadji: Although oil prices declined significantly-from a peak of $147 in mid-2008 to a low of $34 in December of that year-the authorities were able to cushion the impact of the global crisis through financial sector support measures and countercyclical fiscal policy using the foreign exchange reserves accumulated over the boom years. This was true especially in Saudi...