Gulf Countries Should Refine Policies to Ensure Financial Stability

Gulf countries remain susceptible to boom and bust of credit and asset prices

Reliance on oil revenues, importance of real-estate sector are sources of risks

Refining macroprudential policy is key to better manage financial cycles

Higher oil revenues increased liquidity in the banking sector. The increase in government spending and bank lending boosted activity in the non-oil sectors of the economy, particularly construction in some countries. Credit and asset prices rose, moving closely with the oil price cycle.

The credit and asset price boom came to an abrupt end as the global financial crisis hit the member countries of the Gulf Cooperation Council in late 2008. Real estate prices fell significantly (particularly sharply in Dubai), lending cost increased, and external funding conditions tightened.

The experience of the Gulf countries during the crisis brought home the importance of expanding central banks’ traditional mandate to include financial stability as a key objective.

An IMF team, comprising Ananthakrishnan Prasad, Zsofia Arvai, and Kentaro Katayama, looks at the role of macroprudential policies in these countries.

In an interview, the three authors explain the role of macroprudential policies and why they are important for this group of countries, discuss the group’s experience with macroprudential policies so far, and recommend a framework for more sound implementation of the macroprudential policies going forward.

IMF Survey: What is macroprudential policy and what does it cover?

Arvai: Macroprudential policy is the set of tools that financial authorities and regulators use to preserve stability in the financial system as a whole and, hence, reduce the frequency and severity of financial crises. A general goal of macroprudential policy is to limit the risk of system wide distress that has significant macroeconomic costs to the economy. The other major objective is to strengthen the resilience of the financial system to unfavorable developments.

The list of macroprudential policy tools includes, for example, loan-to-value or debt-to-income ratios, countercyclical capital buffers and provisions, or sectoral capital requirements. These tools aim to contain rapid credit growth, which— if unchecked— could destabilize the financial system, and, ultimately, bring about a recession and drive up unemployment as we have seen during the global financial crisis. Macroprudential policy tools differ from micro-prudential measures that...