By Satish Kanady
The Peninsula
DOHA: An IMF document that examines the links between global oil price movements and macroeconomic and financial developments in the GCC has noted the GCC economies can be adversely affected by low oil prices for at least two reasons.
The report “The Impact of Oil Prices on the Banking System in the GCC” released on Friday said: “First, the GCC economies are highly dependent on oil and gas exports. During 2011–14, hydrocarbon exports represented about 70 percent of exports of goods and services on average. Fiscal dependence on hydrocarbon revenues was even greater, accounting for over 80 percent of total fiscal revenues on average. Over the past decade and a half, the dependence on hydrocarbon fiscal revenues did not decline despite efforts at economic diversification.”
Second, macro-financial linkages in the GCC can amplify the effects of oil price movements over the financial cycle. Oil price movements and government spending policies create feedback loops between asset prices and credit that can lead to the buildup of systemic vulnerabilities in the financial sector.
The report reminded how systemic financial sector risks rose in the GCC countries with the oil price upswing in the years before the 2008 global financial crisis. An expanding deposit base and high liquidity (owing to high oil prices and short-term capital inflows) resulted in credit and asset-price booms before the global financial crisis. There was a sharp increase in household leverage between 2004 and 2008 in Oman. Citing another IMF document, the Fund suggests that the bursting of a domestic real estate bubble and tightening global liquidity conditions played a role in the United Arab Emirates’ 2009 financial crisis, while defaults in 2008 by two of the largest investment companies in Kuwait imposed strains on the banking system, with the third-largest bank having to be recapitalised. A separate IMF document discussed Qatar’s preemptive recapitalisation of banks and other measures to support the banking sector in 2009. As the global financial crisis hit, asset prices and credit declined in several GCC countries, although fiscal stimulus and liquidity support helped cushion the impact.
According to the IMF document, evidence suggests that oil price performance has been an important driver of business and financial variables in the GCC economies. First, stronger performance of real and financial variables tends to be associated with oil price upturns. For instance, during 1991–2014, the growth rates of real government spending and non-oil GDP were much stronger during oil price upturns than during downturns. Second, the timing of downturns in business and financial variables in some cases coincides with that of oil prices.
Contractions in credit and equity markets reflected oil price movements, along with global financial market developments and the underlying domestic vulnerabilities. Importantly, contractions in real government spending occurred as often as real oil price downturns in the 1990s, but less so since 2000, likely aided by greater fiscal buffers.
Strong banking sector soundness provides an important buffer in the GCC to the oil price decline since mid-2014. GCC banks have strong capital and liquidity buffers as of end-2014.
