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Effect of Global financial crisis on the Gulf Countries Essay

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Updated: May 1st, 2019

Like the saying goes “when the US catches a cold, the rest of the world coughs.” The financial crisis which hit the US in the late months of the year 2007 have over time spread to almost all other countries in the world. The crisis started in the US housing markets which had over the years unsustainably overvalued.

When the high values could not be sustained, the bubble burst resulting in drastic reductions in the prices a factor which led to a surge in default rates resulting to massive losses to investors as well as loan applicants.

The effects spread into the real economy causing a shrink in the level of GDP for the year 2008 a phenomenon which had not been experienced in the US for decades.

After initially being reported in the US, the financial crisis first spread to the rest of the western countries such as the UK and other European countries with very close trade and nontrade ties with the US.

It later spread to other Eastern nations including the Gulf region. This paper looks at the spread of the financial crisis to the Gulf countries with greater emphasis to Dubai and Bahrain.

The spread of the financial crisis to the gulf region occurred due to several reasons. The first and most visible channel was through trade in oil. The Gulf region is known to rely heavily on oil exports to support their economies. The region is heavily endowed with oil reserves which are a significant source of oil for the western countries such as the US and the UK.

As the financial crisis hit the real economy in the west, demand for oil drastically fell. This was due to the fact that demand for oil is significantly determined by the amount of economic activity taking place. Oil is a source of energy which drives production.

As the US experienced a shrink in economic growth, the amount of oil demanded drastically fell. Economic laws of demand and supply dictate that in cases where demand is lower than supply levels, prices have to be significantly reduced.

A fall in the prices of oil spelt a huge blow the revenues received by the gulf countries. Bearing in mind the importance of oil revenues to the region, the economic prospects were suddenly changed (Khelifi, 2009, par4-6).

Secondly, Bahrain and Dubai have over the past few decades been determined to stop overreliance on oil. Finance and tourism have been identified as feasible alternative sources of revenues which are more stable and able to outlive the relevance of oil in the international market as well as possibilities of depletion of oil reserves in the future.

Focus on finance meant that the government had prior to the financial crisis put in place favorable policies to encourage both local and international investors and financial services providers to consider the region as a suitable financial hub. Te response had been impressive as financial services sector had been growing at high rates.

Again and more importantly, a significant proportion of investors and service providers either originated or had very close ties with the west.

This being the case, as the crisis took toll in the western nations ravaging the financial service sector and causing huge losses to investors, the inflows of capital to places such as Dubai which had been phenomenon was drastically curtailed.

This in effect slowed down the expansion of the sector as well as other closely related sectors. In the year 2009, it was evident that banks and other financial institutions in Dubai significantly cut their lending a situation occasioned by speculation over the future of property markets

The tourism sector got a beating from the reduction in tourist arrivals from the west who accounted for the largest percentage of tourists in the region.

As incomes for westerners fell due to the spread of the financial crisis into the real economy, less people were willing to travel for fun. The implication of this was a drop in the revenues earned from the sector and a blow to the region’s economic prospects.

During the start of the crisis in the west, most analysts predicted that the Gulf region would be immune due to the strong fundamental advantages created by the sale of oil. Despite the fact that current statistics show that these assertions were largely flawed, it is clear that the effect of the crisis to the Gulf region were much less severe as compared to the west.

The lower oil prices, reduced liquidity in the financial markets and subsequent reduction in share prices to a vast majority of companies in Bahrain and Dubai as a result of the crisis cannot be compared to the collapse or near collapse of numerous financial institutions as well as other major industries such as the automotive industry witnessed in the west.

There were significant disruptions in the property markets especially in Dubai where the properties reduced in the wake of reduced demand. Indeed, construction of new properties had stalled late in the year 2009 and early 2010 and a significant number of people rendered jobless.

In the early months of 2010 a large number of foreign employees had to leave for their home countries after being laid off especially from the construction industry. Nevertheless, this is not comparable to the mass layoffs witnessed across a wide range of industries driving up the unemployment rate to levels above 10% in the US.

In Dubai, the crisis is more entrenched than Bahrain. Out of the 410 licensed financial institutions comprised of banks as well as non banking financial institutions in Bahrain, not one failed.

A few of them made some losses mainly due to their heightened exposure to toxic assets requiring the authorities to inject just over 150 million dollars as a way of stabilizing the sector.

Notably, the regulatory framework in place in Bahrain which ensures that the Central bank is always vigil in supervising the financial institutions proactively enabled the financial sector refrain from the extensive effects experienced elsewhere in the region.

The fact that only a maximum of 30% of the banking portfolio can be directed to the real estate developments means that there was significant limitation to the exposure of the financial institutions to the property market instabilities.

In Dubai, the economy was already highly in debts obtained with the intention of building infrastructure in the country. These debts put the country in a much worse situation than Bahrain (Ali, 2010, par3).

In addition, the growing application of Islamic model of banking which is unanimously agreed to be less risky than the conventional banking models made the financial sector in Bahrain and Dubai more resilient to the financial crisis (Hamzan, 2008, par5).

As can be seen, the financial sector in both Dubai and Bahrain was affected marginally. This coupled with the surpluses accumulated from the sale o oil in the boom years preceding the crisis ensured that there was adequate funding for projects even in the face of the turmoil. The two countries managed to stay afloat and still record economic growth rates of above 3%.

Due to the great advantages presented by the accumulation of oil and gas revenues over the past decades, the gulf countries are less worried of the downturn per se but rather the ensuring that the downturn is orderly.

This is in consideration of the fact that prior to the recession; the economies were experiencing what economists call ‘overheating’ due to the boom. Inflation rates were high as people engaged in extreme and often flawed speculations which drove prices up especially in the property markets.

As such there was a growing need to slowdown the economy and build more on the fundamentals before stimulating the economies again.

The recession thus presented a great opportunity to reverse some of the effects of overheating. This is because it is evident that indices such as inflation and interest rates have largely stabilized throughout the region.

Notably, the global recession leaves the economies of Bahrain and Dubai stronger as it has offered a great opportunity for the countries to develop strong economic fundamentals.

This has been achieved with he slowed but not stalled economic growth in the region (Ravichandran, 2009, par4). Again as the world economy returns to the growth path, Dubai and Bahrain are now better placed to handle future crisis

Reference List

Ali, M., 2010. Bahrain ’safe from global jobs crisis’. Web.

Hamzan, M., 2008. Islamic Banks Unaffected by Global Financial Crisis. Web.

Khelifi, S., 2009. . Web.

Ravichandran, K., 2009. . Web.

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