Executive Summary
Most economists have described the financial crisis of 2008 as the worst economic crisis since the great depression of 1930. Using Kuwait as an example, this paper tries to explore the negative effects of 2008 global depression. Kuwait was successively growing economically with a GDP estimate of 6% per annum. The oil export of Kuwait was at its highest at an estimate of 95% in comparison to other nations which fall bellow Kuwait. Kuwait faced various challenges among which are inflation, credit growth, and the escalating asset prices.
At the year 2008, the intensity of the crisis was at the peak, causing oil prices which led to a decrease in production and drop in GDP of Kuwait. This had very severe economic effects to the financial institutions, for instance, the Gulf bank in addition to Non-bank (NBK) institutions with no strong capacity to accommodate the great losses. The riskiness of NBK and several banks is their high capital adequacy ratios.
The government of Kuwait had to come in to alleviate the underlying challenge of economic downfall. The government had to use capital injection specifying high level spending and other exceptional financial measures. The Kuwait Central bank in collaboration with the government implemented different strategies to rescue the fall in the stock market by liquidity support, both long-term and short-term deposit guarantees, and finally, the implementation of monetary easing policy.
The economic activities of Kuwait expose it to risk as its main export dependence on the global market oil, demand, and prices had a negative impact as they dropped drastically. This caused unfavorable terms of trade to Kuwait foreign exchange. The GDP dropped at an estimate of 21.1% by 2009, approximately KD 8490.4 million in comparison to six past years. The decline of GDP is aliened to the dependence of Kuwait on oil and gas as the main GDP contributor at 50%, as estimated in 2010. The bank credit rise popped in within this period and continued at those levels calling for its recovery.
The inflation rate of Kuwait went to greater heights, but as at 2011 it was 4.7% with the hope of further decrease, the employment rate also went high; at 2011, it dropped with consumer price index being stable. The stock exchange also experienced a decrease averaging to 3% of transactions during the year before the economic crisis. However, the volumes of trade raised approximately by 31.5%, around 25.5 million shares.
Conclusion
Robust understanding of macroeconomic and idiosyncratic shocks including identification of risk-prone financial system structures in the economy of nations will do a big deal in strengthening the capacity and capability to face away economic shocks. Kuwait, for instance, by being dependent on petroleum products only, is vulnerably exposed to a downfall in cases of the idiosyncratic shock with effects to oil market, demand, and prices.
Economic diversification in terms of export is highly recommendable as a strategy to preparedness against threatening economic situations. OPEC makes it clear that increasing oil prices poses a severe threat to the economy as oil price increase will manifest on the prices of other basic commodities. Inflation will usually set in if basic food prices are increased. This gets its explanation from the situation of Kuwait in the year 2008. However, the future of these nations dependent on one community for export lies on the improvement of economic performance by diversification.