Financial markets

The financial elements of the global crisis have already taken a toll on the region, particularly through equity markets—affecting the cost of capital for firms and inducing a large-scale loss of wealth for households and institutions.
Some estimates suggest that GCC sovereign wealth funds lost 27 percent of their value in the 12 months ending December 2008, with losses as high as 40 percent among those funds heavily allocated to emerging markets and private equity placements.¹⁰ 

GCC equity prices in dollar terms dropped by some 58 percent between September 15, 2008 and March 12, 2009 (a period during which virtually all bourses registered sharp declines).
Over the same period, equity prices in UAE plummeted by 70 percent, contrasted with a decline of 55 percent for all emerging markets (see figure on previous page).

Since mid-March 2009, a global stock market rally has set in, grounded in improved expectations for the health of the international banking system (in the wake of the G-20 London Summit and following measures undertaken by the U.S. Treasury).

Middle East and North African equities have participated in the upturn, with the GCC index gaining 37 percent through end-May, contrasted with a 52 percent increase in the MSCI-all market index over the period.
The moderate gains for regional bourses are nonetheless indicative of improving confidence in the potential for the global economy to recover sooner rather than later.

The banking sector in the region has weathered the crisis relatively well, in part because of limited direct exposure to subprime mortgages and related asset-backed securities.
However, a Kuwaiti bank suffered significant losses in late 2008 from trading in currency derivatives. In response, many banks across the region tightened lending standards, and, in some countries, reduced lending directly.

The impact of the crisis on investment firms in the region is less clear, mainly because of data unavailability.
However, anecdotal evidence suggests that some firms may have run into financial difficulties due to maturity mismatches on their balance sheets.

As elsewhere, access to external financing has become more difficult and borrowing spreads increased for countries in the region following the eruption of the crisis.
Most countries did not need to borrow during the latter part of 2008 because they had generally favorable balance of payments positions and access to alternative sources of financing, such as remittances, FDI, tourism receipts, foreign aid, and international reserves.

The table below highlights the general financial health of the developing region over the period since 2005, when higher oil prices, generally favorable terms of trade and export market growth began to move current account surplus positions into double-digit shares of regional GDP.
Net additions to reserves accumulated to more-than $140 billion over the period, as aggregate current account surplus positions were complemented by increasing inflows of FDI, which rose from $7 billion during 2004 to $25 billion in 2006 (or 4.5 percent of GDP).

FDI was increasingly sourced from the GCC countries and targeted at a wide range of infrastructure, real-estate and industrial projects across the region, from Morocco to Jordan.
As global financial conditions began to deteriorate during 2008, FDI flows receded to a still-high $22.5 billion.

However, worker remittances (bottom panel of table A.10) continued to increase, helping to support reserve accumulation at a substantial $43 billion pace in the year.

¹⁰ Council on Foreign Relations (2009).