Strong government intervention to mitigate the effects of the 2008 global fiscal crisis kept growth in many sectors in Gulf oil producers but a full recovery is expected to take time, the Arab Monetary Fund (AMF) has said.
Although government fiscal support played a crucial role in cushioning the repercussions of the crisis, it has jolted the region’s economies and forced the six Gulf Cooperation Council (GCC) countries to shelve projects worth nearly $575 billion in 2009, the Abu Dhabi-based Fund said in a study.
It said the crisis had underscored the risks of heavy reliance on oil exports following the collapse of crude prices in late 2008 and the need for stronger inter-GCC fiscal and monetary coordination.
“The intervention by the GCC governments to contain the impact of the crisis and their heavy support for the financial and banking sectors in member states allowed them to limit the crisis repercussions while the non-oil sector maintained its growth despite a slowdown,” said the AMF, a key Arab League organisation.
“But expectations show that a full recovery from the repercussions of that crisis will take time before member states regain sustainable growth rates due to the post-crisis volatility in the global economy.”
Although the non-hydrocarbon sector in most members remained relatively strong thanks to the sharp increase in public investment, the crisis has exposed their heavy reliance to unpredictable oil sales, which still dominate most regional economies, the AMF said.
“This should prompt them to push ahead with reforms to diversify their economies and ease dependence on oil exports…at the same time they should safeguard their savings from the last oil boom so they can be used in fiscal expansion measures during recessions.”
The report said the crisis had also underscored the risks of sharp increases in bank domestic credit during the pre-crisis boom years and the heavy reliance on foreign financing.
“It also highlighted the risk of increasing exposure by many banks to the volatile real estate sector and stocks as well as their use of hot money and short term deposits in funding long-term projects and loans…this problem has also highlighted the fact that the supervisory role of the local financial authorities has not been able to match the rapid developments in the domestic banking sector given its openness and inter-dependence with the global financial order.”
The AMF, an IMF-style Arab fund, urged regional banks to end curbs on lending to support the local economy after they succeeded in expanding their capital and building sufficient reserves.
But it also advised GCC monetary authorities to intensify their supervision and intervention in the domestic financial sector to “cope with the rapid global developments in the monetary and financial fields and prevent a fresh crisis in the local market.”
“At the same time, GCC countries need to bolster their financial and monetary cooperation by using macro-prudent tools to counter cyclical effects given the limited effects of their monetary tools due to the existing peg between their currencies and the US dollar….creation of a debt market in member states will also help investors in diversifying their assets and portfolios away from the traditional role of banks…this will give them more financial dept.”