Introduction
Rapid globalization of international markets has given rise to global crisis and emerging markets like that of Bahrain characterized with strong fundamentals attributed from sudden inflows and outflows of foreign investment has not been an exception.
Impacts of financial crisis on the country’s economy have accelerated debate within the mainstream of economics and many market analysts have devised economic stimulus plan to confront the crisis. Global Financial Crisis has provided valuable lessons to both regulators and financial industry hence the need for stronger regulatory frameworks and monetary policies.
Impacts of Financial crisis on Bahrain
Financial crises that usually follow inflation often destroy large volume of wealth causing financial meltdowns. Although GCC countries are endowed with natural resources such as oil and petrochemical products, they are not shielded from the financial crisis. For example, the collapse of Lehman Brothers subjected the economy into unpredictable phase of financial crisis.
There were reports of increase in risk aversion in financial markets, as indicated by rise in risks premiums and steep fall in global stock markets. It is however, important to note that, a continuing period of low risks premiums could mean prolonged downturn of asset price inflation and devastate the economy of a nation which may subsequently reverberate beyond the country’s borders.
Collapse of Lehman brothers led to immediate liquidity in international financial markets and large bank hence deepening the current economic status of the country (AMEinfo 2009, online).
Further research to substantiate the impact of financial crisis on Bahrain suggest that other sectors of the economy such as financial services, tourism and real estate were affected as well. Some of the impacts included loss of sovereign wealth funds, decline in capital inflows, global trade, unstable oil prices and major investments projects were scaled back.
Since majority of Bahrain economic stimulus package was proposed to come from corporate earnings, AME info (2009, online) proposes that in order to mitigate the impacts of financial crisis, banking sectors will be required to recapitalization their funds and offer guarantees on deposits and to maximize exposure by publishing daily, monthly and quarterly reports on their liquidity positions.
Studies have consistently found that impacts of financial crisis are intertwined between there sectors of the economy that include; financial sector stability, key economic sectors and economic performance. The three dimensions are further divided into growth, inflation, external balance and public finance in measuring the extent of financial crisis.
In economic growth aspect of GCC countries, the global recession that hit the countries in 2009 resulted to a decline in real GDP rates by 3%. According to Markaz News (2010, online), Bahrain was anticipated to experience fiscal deficit of -2% of GDP in 2010 since most foreign investors pulled out of the capital markets and there were reports of decline in international reserves.
The Bahrain government however did step up by drawing contribution from reserves and external balance to stimulate the economy. In public finance sector, GCC countries recorded sharp decline in oil revenues which subjected Bahrain to risks of running budget deficit.
AMEinfo (2009, online) reports however indicated that the country high spending prior to the crisis and massive public investment programs depleted the country’s reserves hence making it vulnerable to any fiscal retrenchment.
Other non-financial that reported to be adversely affected by the financial crisis include real estates and tourism sectors. Real estates for instance recorded significant drop in demand and decline in prices during that period and GCC hotels on the other hand reported less revenue and lower occupancy rates.
Amidst the crisis, banks in emerging markets such as Bahrain should implement high standards of risks management offer incentive for adequate self-regulation, corporate governance and internal controls to prevent excess risks taking. The correction of this market margins would require Bahrain to undertake several reformatory measures such as regularity changes, corporate governance and transparency in the monetary system to attract foreign investment (AMEinfo 2009, online).
Impact on financial crisis on financial systems in Bahrain limited its credit growth and the banks inability to lend. On key economic sectors, the country recorded a sharp decline in oil and gases exports and other new investment projects have either been deferred or cancelled.
The upstream projects were reported to put pressure on inflation because of the amount of materials and energy services required to put up the project. The country should try and use its future excessive capital in financing the underway projects such as the construction of energy production firms to increase the production capacity and boost the economy (AMEinfo 2009, online).
Since most Arab economies are dominated by family owned businesses, the financial crisis had huge impacts on these private businesses to their exposure to foreign markets. Azour quoted in AMEinfo (2009) stated that “Several family businesses are facing financial difficulties from deterioration in their asset quality, the increase of corporate risks, their lack of focus on core businesses, exposure to hard-hit sectors, and high levels of debt” (online).
In order to recover from the global crisis, GCC countries will be required to work together to recover its financial activities in oil demand by strengthening their fiscal policy and external balances.
Stimulus programs and policy actions towards economic diversification, adopt modern fiscal management infrastructures in investment and social reforms such as subsidy programs and labor policies that will encourage macro-financial stability. Azour also encourages GCC countries to prioritize private investments mostly in non-oil industries, service sectors and high-value industrial services to stimulate the economy.
Bahrain overdependence on foreign financing might have subjected to it to global crisis. Findings summarized by International Monetary Fund (2008, online) reported that banks in Bahrain borrowed from foreign banks to support their credit growth and the sudden inflows of cash might have greatly contributed to high rates of inflation in the country.
This is because inflation accelerated the inflow of capital into banks and which was later flushed out due to the global crisis making the economy liquidity strapped. It’s equally important to note that economic crises that usually follow inflation often destroy large volume of wealth causing financial meltdowns.
Conclusion
In order for Bahrain economy to mitigate the impacts of financial crisis, economic stimulus plans such as investing in robust government spending and good external demands will be required in order to promote corporate economic growth. The country should also improve its regulatory structure and encourage foreign involvement to boost stability and enhance transparency in the banks monetary activities.
Lastly, banks should be encouraged to publish credible reports on annual, monthly and quarterly basis as a strategy to improve transparency on the flow of capital and attract foreign interest. Potential investors reviewing financial statements of the banks will have well informed knowledge of the company to invest in due to the comprehensive notes provided by the reports.
Reference List
AMEinfo 2009,’One year on:the GCC region’s post-economic crisis prospects’. Web.
International Monetary Fund 2008,’IMF Survey Magazine: Interview’. Web.
Markaz News 2010, ‘What to expect in 2010 for GCC Markets’. Web.