The Arab Economies Under2008-09Financial Crisi

Despite financial crises are not new phenomena, the2008-09financial crisisdiffer from previous financial crises both in magnitude and globalization. The2008-09financial crisis has been described as the worst global financial crisis the world hasexperienced since the Great Depression in the1930s. Due to that it has led to the mostsevere global recession; and it was not only banking crisis but also involved severedistress for economic systems.The crisis has caused a considerable slowdown in most developed countries andhas affected growth prospects in developing countries. Impacts of crisis on developingcountries have been through sharp decline in trade, sharp falling in Oil prices, andreductions in financial investment, remittances and other capital flows. Therefore, thecrisis had already substantially slowed growth in most developing countries.Although there is no sub-prime mortgage crisis in the Arab economies, it isdifficult to find an economy in the world that was not affected by the crisis, evenindirectly. No region has been able to shield itself from the impact of the2008-09financial crisis, and Arab region are no exception. The crisis has had a serious directnegative impact on Arab region through the sharp falling in oil prices and turmoil ininternational financial markets, and losses incurred by sovereign wealth funds.Arab Economies were also hit by the secondary effects of the crisis on trade,remittances, official development assistance, tourism, and sharp correction of financialflows. As well as increased unemployment resulting from laid-off workers in the Arablabor markets. The impacts of the crisis on the Arab countries have varied substantiallydepending on highly different pre-crisis macroeconomic contexts, their direct andindirect trade links to crisis affected countries, the structure of trade, the share ofremittances and private financial flows. The Arab countries characterize byVulnerability to trade shocks, and it has determined by Arab’s high dependency onexports, undiversified commodity exports. The problem is raised by the fact that Arab economies depend on primary goodsfor exports. Indeed, the share of oil exports in total exports is about75per cent for theArab region and some of the Arab GCC countries more than79per cent of totalexports. On an aggregate basis, the hydrocarbon sector in the GCC still accounts forabout45percent of real GDP,79percent of total exports and77percent of budgetrevenues.Much has been written on the impact of the2008-09financial crisis on America,Europe and Asia but only little on the Arab countries. So there has been a lack ofsimilar empirical study on Arab countries. This study makes an attempt to take effectsof the global financial crisis on economic performance of Arab economies.The analysis that follows can be grouped Arab countries into four main categorieswhich often used by development agencies to assess economic performance, and tobetter understand the transmission channels between the2008-09financial crisis andindividual country performance. To achieve the objectives of this study we will focuson first group from Arab countries （especially GCC countries） to assess the impacts ofthe crisis on their economies, level policy responses and growing challenges.In fact, our choosing of studying Arab GCC countries attributes to followingreasons:1. The GCC countries are major suppliers of oil in world energy markets.Indeed, together, GCC countries produce about20%of all world oil, control36%of world oil exports and holds around half of the world’s known oilreserves. Furthermore, the GCC economies are excessively oil dependent andare thus sensitive to oil price changes.2. The GCC countries depend heavily on the export of products from oil;the oil sector has consistently represented the largest share in these nations’GDPs. As a result, the GCC was most severely affected by the2008-09financial crisis due to sudden drop in demand on the oil. So, these countrieshave been particularly vulnerable to the external shocks.3. The GCC countries are the richest, with an average per capita GDP of$27,000, compared to an overall Arab average of about$5,700. It contributedclose to$850billion to Arab GDP in2008, or about53%of the total. GCCcountries are also the most involved in world financial markets, mainly throughtheir sovereign funds. 4. The GCC countries are the major source of remittances in the Arabcountries, More than one fifth of total remittances from Saudi Arabia aredirected towards other Arab countries mainly to Jordan, Libya, Lebanon andSyria. And the GCC countries are among the top10countries in the world interms of migrants. These are Qatar (1^st), United Arab Emirates (3^rd), Kuwait(5^th) and Bahrain (10^th).5. Some Arab countries as Lebanon, Jordan and Djibouti have a stronglinkage with GCC countries through Official Development Assistance.Considering this background, studying this role and identifying the impacts ofexternal shocks （especially oil shocks） on other macroeconomic indicators is of greatimportance.The2008-09financial crisis and the sudden decline in oil prices highlight theneed of such studies in order for policy makers to be able to stabilize output and prices.However there has been a lack of similar empirical study on GCC countries. Thispaper attempts to fill this gap by answering how and to what extent2008-2009financial crisis impact on the GCC economic performance. From here comes thesignification of this study in the necessity of analyses of impacts the2008-09financialcrisis on economic performance of the Arab countries, especially study centered on themajor oil-producing GCC countries.This dissertation is comprised of six chapters. Chapter one （introduction）introduces the theoretical and practical significance of financial crises and its impactson Arab economies, provides a brief review of the relevant literature about economicimpacts of the2008-09financial crisis, then describes the problem background andexplain problem statement.The second chapter provides a theoretical background related to analysis of thefinancial crises for understanding the nature and attributes of financial crises, and givestaxonomy of crises according to their causes or generating factors. Likewise, variousconceptual definitions in identifying a financial crisis are discussed. In the followingsection the concept of financial crisis is examined. A theoretical framework isintroduced to analyze the causes and consequences of financial crises.The third part describes international transmission mechanisms of their financialcrises, which arises when countries are linked via trade or finance. And we showwhich of these transmission channels are most important. In this part, we identify the contagion and its effects on developing countries. We then provide explanatorytheories for contagion of financial crises. In the next section of this part we pose somehistorical significant evidence on the existence of contagion effects with regards to theAsia crisis, the Russia crisis and the September11crisis. After that we analyze the keychannels transmission of the2008-09financial crisis in the developing countries aswell as its impact on the Arab economies.This is followed by provide a snapshot of the Arab Economic Performance beforethe crisis, and clarifies vulnerability of Arab economies to external shocks, thenanalyzes the main transmission channels with negative spillovers （the impact shock ofthe financial crisis） on Arab countries.From the above perspective the effect of a financial shock on open economies,such as Arab countries can be analyzed by focusing on the following threetransmission channels:1. The Financial Channel （Financial Contagion）One of the important channels for transmission of the crisis from developed todeveloping countries has been via capital flows. The financial crisis have affected theArab economies by financial sector pressures, tighter liquidity, falling property values,and rocky stock markets through decreasing overall financial wealth.Several Arab markets are not much integrated into world markets, while GCCmarkets suffered heavily from a sharp though probably transitory decline in worldmarket prices. Therefore, the financial sector in the other Arab countries was lessexposed to the global financial turmoil than that of GCC countries.2. The Real Economic Channel （Trade Contagion）Most Arab countries face a decline in export growth as a result of the globaleconomic slowdown. In particular, there has been a significant decline in the prices ofkey commodities exported by Arab countries since the second half of2008. The globaleconomic downturn in developed countries negatively affected the exports of mostArab countries, and the oil producing countries have been particularly affected fromfinancial crisis. As a result, most oil-exporting countries in the Arab region havetemporarily experienced a50–75per cent reduction in their export revenues and asubsequent50per cent reduction in their GDP. 3. The Resource Transfer ChannelThe Resource transfer Channel is the most indirect and lagged effect of the2008-09financial crisis. Remittances and ODA are the two main sources of internationaltransfers.Remittances are an important source of external capital for many Arab countries.Arab oil countries are the major source of remittances in the Arab countries, especiallyGCC countries are among the top10countries in the world in terms of migrants as interms of percentage of total population. As a consequence of the financial crisis, someof the Arab countries experienced a tangible decline in the volume of remittancesreceived from abroad during the first half of2009because a considerable number oftheir nationals are working in the GCC countries which have suffered significantlyfrom the decline of world energy prices.Some of Arab countries as Lebanon, Jordan and Djibouti have a strong linkagewith GCC countries through ODA, these countries became worsen after the crisis dueto sever contraction in the stock markets and declining oil prices in the GCC countries.The level of development assistance received from donor countries as well asfrom international organizations has declined as a result of the financial crisis.The fourth chapter complements previous assessments to the impacts of2008-09financial crisis on Arab countries, particularly on GCC countries; and their policyresponses, and puts them into a regional perspective, taking into account thecharacteristics of GCC countries in the Arab region. We briefly present an overviewthe macroeconomic performance of GCC prior of the crisis, and assess the impacts ofthe crisis on GCC real economic variables through real GDP growth, inflation rate andcurrent account. We then clarify the impacts of the crisis on GCC financial marketsand institutions.This chapter examines empirically the relationship between global shocks through2008-09financial crisis and some selected macroeconomic variables in major oilproducing GCC countries （Saudi Arabia, Kuwait, and UAE） using a VAR model. Theglobal economic recession that resulted due to the2008-09financial crisis has alsobeen accompanied by significant falls in oil prices. Therefore, while previousrecessions （1974-1975,1981-1982,1991-1992and2001-2002） did not have asignificant negative impact on Arab oil-exporting countries, this current recession isdifferent because it has been accompanied by a substantial decrease in oil prices.The results of the VAR analysis and the impulse response analysis providereasonable grounds to believe that the impact of an oil price shock had a significant adverse effect on GCC’s gross domestic product （GDP）, inflation and unemploymentrates.The results suggest that oil prices have a statistically significant effect on theoutput growth of Saudi Arabia, Kuwait, and UAE. Overall, we find that the price of oilis a major determinant of economic activity of the GCC economies. Our impulseresponse functions suggest that following a negative oil price shock, output falls withinthe first two years followed by positive and growing response.We then analyze the impacts of the crisis on FDI inflows. The global FDI inflowsto the Arab region have dropped by21per cent in2008and have declined further in2009. In following sections we show the impacts of the crisis on GCC labor marketsthrough decline in profits of private sector companies that have resulted naturally tocuts in wages. This fall in wages was mainly due to the decline in demand for labor asmany projects were cancelled completely or their implementation was delayed. Wethen discuss policy responses in the GCC countries and offer some considerationsregarding possible pathways to strengthening employment and social protectionpolicies.The fifth chapter reviews the outlook of World Economy, Arab Economies andOil prices developments after the crisis and analyzes some of the key challenges thatface Arab Economies in their development path.The major global challenges that have affected Arab economic performanceduring the financial crisis, and they are still threats to sustainable economic recovery inthe medium-term include: challenges of past crises; fragile global economic recovery;slow recovery in world trade; highly volatile oil-and non-oil commodities prices; risingpolicy interest rates; and deteriorating debt situation in advanced economies.The adverse external factors have been compounded by a number of domesticfactors such as rising unemployment, weak economic integration among Arabcountries, and some fundamental weaknesses in macroeconomic policies, resultingthreats to sustainable economic performance of Arab countries.A critical economic challenge for the GCC countries would be a sharp decline inoil prices below the fiscal and current account break-even point. As oil prices are muchhigher than this, GCC economies are largely secure from falling into a deep recession.The medium-to long-term economic performance of the GCC countries will mainlydepend upon the movements in oil prices.The last part of this dissertation presents several conclusions. The2008-09financial crisis has had a serious direct negative impact on Arab region through the sharp falling in oil prices and turmoil in international financial markets, and lossesincurred by sovereign wealth funds. The previous economic recessions （1974-1975,1981-1982,1991-1992and2001-2002） did not have a significant negative impact onArab GCC countries; while this current recession is different because it has beenaccompanied by a substantial decrease in oil prices. We conclude that the commonbelieve about the major GCC economies that global shocks through financial crisisdoes not have any impact is not quite accurate. And as the World Economy and WorldTrade faced a fragile recovery, there are still challenges that the Arab Economies willdeal with, an appropriate policy response will be helpful for Arab Economies to realizea sustainable economic recovery.