## IMF Survey: Gulf Countries Limit Fallout from Crisis

_IMF News, March 12, 2010_

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## Bibliographic details
- Published: March 12, 2010

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### Overview and main findings
- GCC countries managed to contain the fallout from the global financial crisis, but the crisis revealed financial sector vulnerabilities that need to be addressed.
- The authorities reacted swiftly and appropriately, and their response largely contained the effects of the crisis despite lingering uncertainties such as the Dubai World debt standstill announcement in November 2009.
- Direct exposure of GCC commercial banks to U.S. subprime assets was relatively low, so direct impact from U.S. subprime assets was limited.
- Banks continued to post profits throughout the crisis and overall impact on the financial sector was moderate.

### Macroeconomic and financial context
- Oil prices declined from a peak of $147 in mid-2008 to a low of $34 in December of that year.
- Oil GDP contracted in 2009; non-oil real GDP growth in 2009 was around 3 percent compared to 6 percent in 2008.
- Private sector credit to nonoil GDP nearly doubled during the period 2003-2008.
- Inflation rose from "1-2 percent" to two-digit levels prior to the crisis.
- The UAE and Bahrain were among the countries most severely affected by liquidity reversals tied to foreign financing outflows.
- Dubai represents only 10 percent of the GCC’s GDP; intra-GCC trade is about 10 percent of total GCC trade.
- Some losses from asset-price declines can take up to 2-3 years to materialize on banks’ balance sheets.

### Vulnerabilities identified
- High rates of credit growth (2003-2008) increased exposure to asset-price reversals and economic slowdowns.
- Rising bank leverage and greater dependence on foreign financing (direct borrowing and "hot money") made banks vulnerable when short-term inflows reversed.
- Overheating driven by strong economic activity and speculative capital inflows pushed up real estate and equity prices.
- Currency pegs (all GCC countries except Kuwait) limit monetary policy flexibility because pegging imports U.S. monetary policy; business cycle divergence since late 2006 created policy tensions.
- Two GCC countries have systemic nonbank financial institutions: Kuwait (investment companies) and the UAE (mortgage finance companies).

### Assessment of policy response
- Authorities used foreign exchange reserves and countercyclical fiscal policy to cushion the crisis; Saudi Arabia’s stimulus package was the largest (as a share of GDP) of any G-20 country.
- Swift and comprehensive financial sector support measures helped maintain stability and public confidence.
- The currency peg was maintained (Kuwait reverted to a basket of currencies in May 2007) because authorities judged benefits to outweigh transitory inflationary pressures.

### Policy recommendations and reform priorities
- Immediate priorities:
  - Ensure the cleanup of banks and nonbanks proceeds smoothly.
  - Banks should recognize losses upfront and recapitalize where needed.
  - Conduct forward-looking asset-quality monitoring, including stress testing.
  - Monitor closely banks with exposure to real estate or systemic risk and enforce corrective action promptly.
  - Facilitate restructuring of systemic and viable nonbank institutions and exit of nonviable ones.
  - Put in place a more comprehensive, explicit legal framework for government intervention in banks and other financial institutions to enable efficient, cost-effective resolution and restructuring options.
- Structural and longer-term reforms:
  - Increase transparency and financial disclosure across GCC entities.
  - Align policies to address both macroeconomic and financial sector stability.
  - Develop local and regional debt markets to diversify financing channels away from banks.
- Tools to prevent overheating:
  - Monetary policy is constrained by the dollar peg.
  - Fiscal policy should be less procyclical, though political economy pressures make this difficult in oil-rich countries.
  - Prudential regulation and supervision (including reserve requirements) should be used and more strictly enforced to limit risk-taking and sectoral exposures.

### Impact of Dubai debt standstill
- Main transmission channels: trade (limited) and financial (stronger through bank balance sheet exposure to Dubai property and construction markets).
- Assuming the Dubai credit problem remains contained and resolution occurs rapidly, regional impact should be limited.
- There are spillover effects on labor-exporting countries such as India and Pakistan due to Dubai’s employment of large numbers of workers from these countries.
- Isolated advanced-economy banks were hit but none had systemic exposures.

_Interview published March 12, 2010. IMF Survey online. © International Monetary Fund._

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Survey Interview](https://www.imf.org/en/news/search)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Read research summary in F&D](https://www.imf.org/external/pubs/ft/fandd/2010/03/khamis.htm)
- [Dubai fallout contained](http://www.imf.org/external/pubs/ft/survey/so/2009/CAR120409A.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/soint031210a_