Measuring the damage from financial integration in the GCC : lessons from the global crisis

Abstract EN

In the wake of the global financial crisis, several leading countries of the Gulf Cooperation Council (GCC) experienced considerable economic slowdowns.

Equity prices tumbled, bank credit dried up, GDP growth rates came to a halt, spreads on sovereign bonds soared, and risk aversion increased dramatically.

These events have demonstrated the negative consequences of financial integration which, combined with financial innovation and deregulation, have increased vulnerabilities in the GCC and created heightened systemic risks.

Using data from 2001 to 2009, we calculate a measure of financial stress for GCC countries and estimate the harm caused by the financial crisis to the region’s real economy.

Our results show that between 2008 and 2009, economic activity in the GCC has slowed by 2.6% after controlling for a variety of factors such as oil and stock price movements.

We discuss how policymaker can initiate countercyclical policies to stave off the damage from future financial crisis.