One year on: the GCC region's post-economic crisis prospects (page 1 of 4)

As the global economy begins to recover from the financial turmoil triggered by the collapse of Lehman Brothers in September 2008, GCC policymakers can take their own steps to accelerate the region's recovery—and protect it from future crises, according to a new study by Booz & Company.

"The crisis emphasized the need for further diversification in GCC economies and highlighted the vulnerabilities in the financial system, driven primarily by high rates of leverage," explained Nabih Maroun, a partner at Booz & Company. To benefit from the global recovery and build a foundation for sustainable growth, GCC policymakers will need to consider a number of key reforms to reshape their fiscal and economic management practices and governance.

The global crisis and GCC economies

Faced with the deepest global economic downturn of the post-World War II era, policymakers around the world responded with a series of unprecedented actions, including in the GCC. "The region seemed somewhat sheltered from the crisis, but by November 2008, it was clear that it would not ride out the storm entirely," commented Richard Shediac, a partner at Booz & Company. The decline in GCC stock markets began to accelerate; oil prices dropped from $110 per barrel at the end of the third quarter to approximately $40 per barrel; and financing began to dry up.

Consequently, some states, including Dubai, Kuwait, and Bahrain were significantly affected by the crisis, as were certain non-oil sectors including financial services, real estate and tourism. "The region as a whole suffered from the slowdown in the global economy; the contraction in global trade, a decline in capital flows, sizeable losses incurred by sovereign wealth funds, and dwindling oil prices," said Jihad Azour, senior executive advisor at Booz & Company.

Many GCC countries devised policy actions to respond to the crisis. Saudi Arabia, the UAE, and Kuwait announced stimulus packages, and the Saudi plan was one of the largest worldwide relative to overall GDP, representing 10.3% of the country's 2008 GDP. The two successive UAE support packages, totaling Dhs120bn, exceeded 12% of 2008 GDP. Kuwait's $5.2bn stimulus plan was designed to enable banks to lend about $13bn (KD4bn) within two years. GCC monetary authorities also took several measures to enhance banks' liquidity, lower funding costs, boost confidence and mitigate tight credit conditions.

Measuring the impact of the crisis

Impact of the crisis on GCC economies can be measured along three dimensions: economic performance, financial sector stability, and key economic sectors.

Impact on GCC economic outcomes
Growth. With the global recession in 2009, real GDP growth rates are expected to decline to below 3% in the GCC region, while these averaged 6.4% between 2003 and 2008. To curb this negative trend, GCC governments undertook additional spending to stimulate local demand and maintain positive levels of economic growth.