Effects of the 2008 Financial Crisis on the Investment in the Gulf Area Especially on Qatar - Case Study Example

Effects of the 2008 financial crisis on the investment in the Gulf area especially on Qatar of the of the Introduction In 2003-2008, performance of the Gulf countries was noticeable keeping in view oil sector boom during that period. The oil sector growth resulted in increasing economic activities, rising confidence of consumers and investors, extensive credit growth and liquidity and increasing asset value. In a number of countries, dependence of the bank on foreign financing heightened during this period. Alongside, growth of real estate, equity market and construction lending brought about addition of vulnerability in the balance sheet. The oil market expansion led to increase in leverage in the corporate sector, resulting in increase in cost of financing and difficulty in availability of finance (Behrendt, Haq & Kamel, 2009). As the financial crisis had struck global economic markets, financial and trade channel of the Gulf countries were strongly affected. The financial markets of the Middle East region suffered heavy losses. The major blow to the governments of Gulf countries was severe decline in oil price and its demand. As demand for oil declined, the highly speculated capital inflow also reversed. These abrupt developments tightened liquidity scenario of these countries. Furthermore, when the Lehman Brothers collapsed in September 2008 ensuing credit crunch in most of the developed economies, it worsened the condition of investors as well as liquidity (Drine, 2009). The crisis resulted in exacerbation of stock indices and decline of composite index by about 60 percent in the Middle East zone. The region comprises diverse countries, which is why impact of the financial crisis can be better understood when these countries are classified based on their similarities (Kuran, 2003). The following sections of this paper extensively discuss impact of the crisis on different countries while concentrating on Qatar. Financial crisis in Gulf countries The financial crisis, although initiated in the United States (US), affected major developing and developed economies worldwide, but the impact differed from one country to another. The Arab region (Gulf countries) was no exception to the prevailing crisis. The main facets of the crisis in Gulf countries were: firstly, reduction in oil price as oil revenue formed the major part of these countries’ GDP (Gross Domestic Product). Secondly, fall in the value of Dollar causing decline in foreign investment and cost of assets owned by these countries in the US. Thirdly, as the crisis affected on a global scale, it led to decline in export of oil, petrochemicals and aluminum. Moreover, the countries that depend upon import of products and investment, suffered severely as import cost increased. Lastly, rise in inflation rate and simultaneous fall in interest rate brought about decline in propensity towards saving as well as investment (Behrendt, Haq & Kamel, 2009). For a better understanding of the crisis impact, it is important to classify the Arab countries as oil producers, oil importers and economically under-developed ones. The oil-producing countries are Saudi Arabia, Kuwait, UAE (United Arab Emirates), Qatar, Oman, Bahrain, Libya, and Algeria. These countries have low level of unemployment and about half of the GDP depends on oil and fuel export (Khamis & Senhadji, 2010). Economies of these countries were affected to a certain extent, but not severely because during rise in oil price prior to the crisis, they had accumulated sufficient reserves. However, the drop in real GDP of these countries was quite significant. Saudi Arabia’s GDP was almost flat in 2009 from 5% in 2008. GDP of countries, such as, UAE and Kuwait, was in negative during the period. On the other hand, in Oman, GDP was observed to drop from 12% to 3% in 2009. In Qatar, GDP dropped from 20% in 2008 to 10% in 2009 (Kuran, 2003, p.414-446). In other countries such as, Syria, Egypt, Lebanon, Morocco, Sudan, Mauritania, Somalia and Yemen, economic condition worsened as these nations already had issues such as, high unemployment, low GDP, poverty and dependence on import. Moreover, non-oil exporting countries were excessively dependent on the European market for investment in various forms. As the European market was hit by credit crunch and recession, this in turn affected these countries. Overall, the financial crisis resulted in stagnant economic growth, unemployment, poverty, recession and inflation in the Gulf countries (Khamis & Senhadji, 2010). Impact of financial crisis in Qatar Qatar is one of the richest Islamic countries worldwide. Petroleum is the key source of revenue of the country and along with natural gas, it accounts for around 50% of the GDP, while accounting for 85% of export earnings. It has one of the largest natural gas reservoirs in the world. Among all other Gulf countries, Qatar was also struck by the financial crisis of 2008. The country managed to escape from direct impact of the crisis, but had faced problems related to liquidity crunch, withdrawal of investors and reluctance of banks towards lending. Even so, Qatar was probably one of those few countries, which exhibited positive growth rate, despite a sharp drop of 10% in its real GDP. One of the main reasons is the reserve created from accumulated revenue, which was earned when the oil price surged prior to crisis (Brandeis University, 2009). The export activities of Qatar suffered to a large extent. As developed countries underwent the current of recession and financial crunch, a sharp decline in demand of oil was observed. Oil and gas are the reason for Qatar to have developed so fast and place itself as one of the high per-capita income countries. The country has been putting in continuous effort since the crisis in order to attract greater share of foreign investment in non-oil sectors and projects by liberating its economy. The impact of oil price plunge, nonetheless, has reduced the reserves and surplus of Qatar and restricted economic growth (Hammoudeh & Choi, 2006). A brief explanation of macroeconomic indicators of Qatar provides a better overview of the economic scenario: In Qatar, inflation has never been a reason for concern for the government until 2008, when it touched an all-time high rate of 15.8%. The unexpected increase in consumer price inflation is accounted for depreciation in US$ against other currencies, increase in property price and rise in demand for goods and services. During 2009, the inflation dropped sharply and took the shape of deflation, which slowly stabilized during 2010 (Brandeis University, 2009). The main factors responsible for growth of Qatar’s fiscal revenue are gas and oil. When the oil price surged, fiscal position of Qatar improved beyond measures and consequently, while major countries all over the world faced balance of payment deficit, the country enjoyed current account surplus. In order to improve fiscal position, the country has maintained minimum expenditure on domestic front so that external debt can be reduced (Brandeis University, 2009). The banking sector of Qatar was not affected by the global economic slowdown because of the reserves created from previously earned oil revenue. Moreover, banks also announced substantial profit during 2008. However, reluctance towards lending continues to persist. To strengthen the banking sector and instigate confidence, the Qatar Investment Authority showed sufficient interest and willingness to buy stakes of locally listed banks. Furthermore, during 2009, the Qatari government expressed its interest in purchasing investment portfolio of banks so as to encourage them to continue lending operations. The banking activities were also influenced by condition of other Gulf countries and caused lending restrictions and slowdown of business in the Qatar Central Bank (Behrendt, Haq & Kamel, 2009). Qatar was to a certain extent benefitted by the Islamic finance sector as activities of Islamic finance banks increased during 2008 and 2009. Banks such as, Qatar Islamic Bank and Qatar International Islamic bank, as well as other conventional banks were a necessity during this period for maintaining the market position. These banks along with their Islamic subsidiaries performed fairly well during first half of 2008, but the financial crisis did have a dampening effect on their growth as well as bond values. The only sector that was least affected by the crisis was Islamic insurance sector of Qatar (Drine, 2009). Conclusion In order to conclude on the investment position in Gulf countries, it was observed that both oil exporting as well as importing countries were dependent on the US and European market for export of their oil related products and investment. The oil exporting countries such as, UAE and Saudi Arabia, experienced a severe drop in GDP as well as were affected by increasing property cost, reluctance of banks towards financing and loss of investors’ confidence. The recession and credit crunch in European countries eventually depleted foreign investment in economically backward countries such as, Somalia and Sudan. This led to high inflation, falling interest rate and very high unemployment rate. The essay has also highlighted impact of the economic crisis on Qatar. The Qatari economy during the surge in oil price had gathered sufficient revenue, which enabled the country to survive the critical period of 2008-09. Overall, it was observed that the country did not suffer too many losses, even when GDP and export demand of its products declined, compared to other Gulf countries. References Behrendt, C., Haq, T. & Kamel, N. (2009). The impact of financial and economic crisis on Arab states: considerations on employment and social protection policy response. Retrieved from: http://www.ilo.org/public/english/support/lib/financialcrisis/download/impact_english.pdf Brandeis University. (2009). Middle East Brief. Retrieved from: http://www.brandeis.edu/crown/publications/meb/MEB40.pdf Drine, I. (2009). Impact of Global Economic Crisis on the Arab Region. Retrieved from: http://www.wider.unu.edu/publications/newsletter/articles/en_GB/05-06-2009/ Hammoudeh, S. & Choi, K. (2006). Behavior of GCC stock markets and impacts of US oil and financial markets. Research in International Business and Finance, 20(1), 22-44. Khamis, M. & Senhadji, A. (2010). Impact of the global financial crisis on the Gulf Coorporation Council countries and challenges ahead: an update. Retrieved from: http://www.imf.org/external/pubs/ft/dp/2010/dp1002.pdf Kuran, T. (2003). The Islamic commercial crisis: institutional roots of economic underdevelopment in the Middle East. The Journal of Economic History, 63(02), 414-446. Read More