Impact of the Global Financial Crisis of 2008 on the Qatari Economy - Research Paper Example

?Impact of the Global Financial Crisis of 2007/2008 on the Qatari Economy The global financial crisis of 2007-08 has been the single most important matter of concern for the world economy in the recent times. There has been wide literature survey of the factors leading to the economic downturn that has become the most severe financial crisis, since the Great Depression. The reasons that had led to the Recession have been discussed in details. The key reason for the crisis was the bursting of the housing bubble in the United States. The empirical data and analysis of the factors that had led to the crisis has been covered. Then, the paper takes into consideration the impact of the global financial crisis on the Qatari economy. The impact on the oil sector, banking industry and the real estate market were studied and a qualitative analysis was made to reach the conclusion. The results imply that the Qatari economy was not fully shielded from the crisis. However, the effect on the country was much lesser compared to America and Europe. The robust performance of the oil sector had made the adverse effects short-lived for the economy. Contents Contents 3 Introduction 4 Data and analysis 5 Causes of the Crisis and Its Impacts on World Economy 5 Impact of the Global Financial Crisis on Qatar 9 Discussion of results 13 Conclusion 14 Work Cited 15 Name of the Student Name of the Professor Name of the Course Date Impact of the Global Financial Crisis of 2007/2008 on the Qatari Economy Introduction Literature states that global financial crisis had occurred during 2007-08 when the financial institutions and the financial system as a whole had collapsed. The causes for this crisis had started well before 2007. It has been established that reckless lending by the banks before 2007, in the form of mortgages, had led to the formation of a housing bubble (Lewis, “The Global Financial Crisis, 2007-08: Origins, Nature and Consequences”). The epicenter of this financial crisis originated in the developed economies and not in the developing ones (Obstfeld, Cho and Mason 230). The crisis in the recent times has been characterized by the failure of the major banks and their subsequent bailouts by the national governments and the cyclical downturn of the stock markets around the world. The complexity of the financial sector and agents has been blamed as one of the chief reasons for the crisis. It has been argued that the regulatory measures were not adequate to control the evolution of the financial crisis which had severe consequences on the whole world (Norgren, “The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions”). This paper will analyze the main reasons behind the global financial crisis and try to find out whether it had affected the economy of Qatar in any way. Data and analysis Causes of the Crisis and Its Impacts on World Economy To understand the causes of the global financial crisis, it would be important to understand the timeline of events that had ultimately culminated in the crisis of 2008. The timeline can be explained with the help of the following diagram. Figure 1: Events that lead to the Crisis (Source: Grail Research, “Global Financial Crisis”) The figure studies in detail the series of events that took place during June 2007 to Oct 2008. The chain of events had begun when the investment giant, Bear Stearns, filed for bankruptcy in the middle of the year. The problem had deepened with the bursting of the housing bubble later that year, when the biggest investment banks started failing one after the other and suffered huge losses. The beginning of 2008 saw the financial institutions fail badly when Merrill Lynch and Lehman Brothers filed for bankruptcy. The American government started to provide bailout packages to the banks in order to prevent the meltdown of Wall Street. The impact of the financial crisis resonated through the entire economy and the GDP growth rates of America fell considerably. This has been captured in the following graph (“United States GDP Growth Rate”). The period prior to 2008 had experienced positive growth rates with an average of 3.25% (“United States GDP Growth Rate”). The year 2008 saw the growth rates plunge to negative values, indicating the massive impact of the failure of the financial system on the American economy. Figure 2: GDP growth rate of US Economy (Source: “United States GDP Growth Rate”) The causes of the financial crisis can be explained with the following factors (Grail Research, “Global Financial Crisis”): Firstly, the access to credits became easy with lucrative mortgage debt products and declining interest rates. This resulted in soaring housing prices and consumers were encouraged to buy houses as banks continued to advance loans without checking the credentials of the customers. Secondly, the slackened regulatory environment of the banking industry was also one of the major factors that had led to the crisis. There was a surge in the number of the sub-prime loans as the banks were readily advancing the loans without following proper background checks about the customers in order to raise the profits. The problem arose during the payback time when the borrowers defaulted on the loans. Thirdly, the regulatory measures were not properly balanced with the ever-evolving nature of the financial markets. This meant that the financial system became more complex and less transparent, while the regulatory authority made no efforts to cope with them, which later proved to be a huge problem for the economy. The innovations in the US financial products proved to be a curse as the controls by the authority were relaxed. Fourthly, the complexity of the credit derivatives was another reason. The innovation of the new product, Collateralized Debt Obligations, led to the uncontrolled spreading of the default rates, once the process began. The problem of sub-prime lending could not be contained as this instrument aggravated the problem. Finally, the above mentioned causes had led to the market failure in real estate industry and the price of houses started falling and the phenomenon was self-perpetuating. The real estate market witnessed excess supply of housing and as the borrowers defaulted, the banks were left with the vacant houses with no one to buy them. At this point, the lenders began to tighten the standards and banks began to default on the loans that were already taken by borrowers. It is now understood that the housing industry in America is the epicenter of the crisis that had engulfed the economies of half of the world in the subsequent years. It was observed that the US household debt had increased consistently over the years since 1980s, before reaching the peak in 2007. The debt rose steeply during the period of lending to the borrowers with inadequate income, which is termed as Sub-Prime lending. This has been illustrated in the following graph. Figure 3: Rise in Household Debt of the US (Source: Norgren, “The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions”) The impact of the crisis was felt by stock markets and the investors globally and the banking system suffered a huge setback. The investors lost confidence in the market and the financial institutions failed to instill confidence among them. The losses were faced by both the individual and institutional investors alike and banks faced the highest proportion of the losses. The estimate of losses by the American and European banks stood around 10 trillion. The inter-bank lending also suffered a setback as the banks lost confidence on each other. One of the major adverse effects of the global financial crisis was the high rates of unemployment and job cuts across the economy. Once the job cuts by the companies began to affect the economy, the financial sector was not the only victim. The effect was felt almost in all other industries like, automobile, telecommunication, retail and various other sectors. The business sectors received a major blow globally as the industrial output declined along with the consumer spending. The worst hit countries were Britain, France, Japan and Germany. The automotive, airline and building materials industry also felt the heat along with the financial sector. The bailout package of the government came to the rescue of the ailing industries, particularly banking. Impact of the Global Financial Crisis on Qatar The economy of Qatar had undergone massive changes with alterations in the political system of the country. After settling the longstanding disputes with its neighbors, Saudi Arabia and Bahrain in 2001, Qatar had prospered significantly throughout the decade of 2000 (“The World Factbook”). Qatar is a member of Gulf Cooperation Council which includes the other member countries of Bahrain, Kuwait, Oman, Saudi Arabia and United Arab Emirates (UAE). In order to understand the impact of the financial crisis, the GDP and growth rate of Qatar has been tabulated. Table 1: GDP growth Rates Qatar (Source: “Qatar”) It can be analyzed from the table that except 2005, the country had experienced robust growth rates in GDP in the last six years. When the world economy was perturbed with the crisis in 2008, the economy of Qatar had experienced a growth rate of 17% when the economies of the advanced countries like, America and Japan, could barely manage 2% growth in GDP (ESCWA, “The Impacts of the Financial Crisis On Escwa Member Countries: Challenges And Opportunities”). The growth rates became a little gloomy in 2009 and again picked up in 2010. The chief reason that helped to dodge the impact of the crisis was the oil price boom from 2002-2008, which resulted in huge accumulation of reserves of the country. The impacts on various sectors of the country can be explained as follows: The oil sector is the chief sector of the country which has contributed to the overall economic growth in times of financial distress. Continuously rising oil prices is the key factor which has contributed almost single-handedly to the growth of GDP. The oil prices began to decline towards the end of 2008, when the demand for oil fell globally because of the recession. The production and export of oil declined and the oil prices started to fall, thereby stunting the growth in 2009. However, the adverse impact on the growth was not as severe as the developed countries. The country continued to record positive growth rates, even though the level of growth declined slightly (ESCWA, “The Impacts of the Financial Crisis on Escwa Member Countries: Challenges and Opportunities”). The robustness of the banking sector is another major determinant in assessing the overall performance of the economy. Table 2: Indicators of Banking Performance (Source: Khamis, et al., “Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead”) The above table represents the various parameters that are relevant in judging the performance of the banking sector. The non-performing loans had declined from 1.5% to 1.2%and the capital adequacy showed improvement from 13.5% to 15.6%. The provisioning rate, returns on assets and equity had shown marginal decline (Khamis, et al., “Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead”). In terms of overall profitability of the banking sector, the profits increased from 2.2% to 2.7% recording a rise of 21.7% (Khamis, et al., “Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead”). In a nutshell, the banking sector had been quite resilient to the crisis, indicating strong control of the regulatory authority. The real estate sector also remained unperturbed during the beginning of 2008 and housing market was one of the most vibrant sectors. There was also record increase in the price of construction goods and rents in 2007. The contribution of the real estate sector to the housing sector of Qatar had increased over the years, from 9.4 in 2005 to10.4 in 2007 (ESCWA, “The Impacts of the Financial Crisis on Escwa Member Countries: Challenges and Opportunities”). In the aftermath of the crisis, the last quarter of 2008 witnessed declining rents in Qatar. The property boom of Qatar was not completely unscathed during the crisis. In November 2008, the price of land began to fall and Doha alone experienced a 30% fall in the interest rates. It has been estimated that the residential rates might increase, but the commercial and industrial rates in the real estate will remain unchanged in the medium term due to the financial crisis. The government responded immediately to the slowing growth rates in 2008-09 by a number of policy measures. The central banks injected liquidity to the financial system through repo rates and also, placed the long-term deposits to improve the liquidity of the economy. The Central Bank of Qatar, unlike the central banks of other GCC countries, did not reduce the policy interest rates or modify the reverse requirements (Khamis, et al., “Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead”). The Government had also bought housing and equity assets to boost the economy (Tata 13). Discussion of results In the limited scope of the study, this paper has tried to focus on the global financial crisis and its impact on the Qatari economy. The economic growth of the country had been almost resilient to the financial downturn. However, the analysis of the GDP figures has revealed that the growth rates began to plummet in the last quarter of 2008 and dropped sharply in 2009. The fall in demand of oil has been the major factor to slow down the growth process to some extent. It has been found out that the oil prices (oil sector being the most significant economic contributor to the GDP) had risen from US $29 per barrel in 2003 to US $140 per barrel in 2008 (ESCWA, “The Impacts of the Financial Crisis on Escwa Member Countries: Challenges and Opportunities”). The oil prices plummeted to US $40 per barrel towards the end of 2008, which proved to be a setback to the overall economic growth. However, the overall picture was not gloomy enough for the country to enter a depression. Despite the fall in oil prices and a reduction in oil production, the economy has managed to maintain a decent economic growth. The analysis of the banking sector has revealed that it remained well-capitalized due to lesser exposure to the innovative financial sector. The profitability of the banking sector remained high as the ratio of loans to the non-performing assets remained low for all the GCC countries, including Qatar. The capital adequacy ratio and the return on the equity investments remained high as well, thereby shielding the economy from the crisis. In June 2008, the foreign liability of the banks in Qatar remained well under control (ESCWA, “The Impacts of the Financial Crisis on Escwa Member Countries: Challenges and Opportunities”). The robust performance of the banking sector made all the GCC countries, including Qatar, to be a net external creditor. In the aftermath of the crisis, the liquidity pressures and funding costs of the commercial banks had increased. Qatar’s external funding was almost protected from the global disturbances, even though other GCC countries faced problems with external funding. A few vulnerabilities of the banking sector had surfaced during the crisis, including the growing dependence on the foreign financing and general weakness of the liquidity management. The analysis of the real estate sector had revealed that it was affected to some extent by the ongoing financial crisis. The slowdown of the real estate sector acts as an impediment to the overall development of the economy, as it has been pointed out that this sector had contributed significantly in the economic development of Qatar. Conclusion This paper has analyzed the causes of the global economic crisis in the period of 2007-08. The bursting of the housing bubble had been the major factor behind the emergence of the crisis. As has been determined, the failure of the financial institutions can be attributed to the sluggish regulatory controls of the government. The paper then analyzed the impact of the crisis on the Qatari economy. The impact of the crisis on the oil prices, banking and real estate sectors has also been discussed in details. From the analysis, it has been recognized the financial crisis had affected the oil prices adversely, which had slowed the growth of Qatar, relative to its previous performance. The analysis of the banking sector revealed that when the banks of the advanced countries had faced huge losses, the Qatari banks continued to earn profits and the capital adequacy ratio was according to the Basel standards. Finally, the analysis of the housing sector suggests that it had also been slightly affected by the world events, but the decline was not remotely as massive as the developed countries. Work Cited ESCWA. “The Impacts of the Financial Crisis on Escwa Member Countries: Challenges and Opportunities.” ESCWA, 2009. Web. 20 Dec. 2013. Grail Research. “Global Financial Crisis.” Grail Research, 2009. PDF File. Web. 20 Dec. 2013. Khamis, May, Abdelhak Senhadji, Maher Hasan, Francis Kumah, Ananthakrishnan Prasad and Gabriel Sensenbrenner. “Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead” IMF, International Monetary Fund, 2010. PDF File. Web. 20 Dec 2013. Lewis, Paul. “The Global Financial Crisis, 2007-08: Origins, Nature and Consequences .” Global Security and International Political Economy 1. (2009): n.pag. Web. 20 Dec. 2013. Norgren, Claes. “The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions.” Ricksrevisionem, 2010. PDF File. Web. 20 Dec. 2013. Obstfeld, Maurice, Dongchul Cho and Andrew Mason. Global Economic Crisis: Impacts, Transmission and Recovery KDI/EWC series on economic policy. Northampton: Edward Elgar Publishing, 2012. Print. “Qatar.” The World Bank. The World Bank, 2013. Web. 20 Dec. 2013. Tata, Juan Carlos Di. Qatar: 2008 Article IV Consultation- Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion. Washington D.C: International Monetary Fund, 2009. Print. “The World Factbook.” CIA. CIA, 2013. Web. 20 Dec. 2013. “United States Gdp Growth Rate.” TradingEconomics. Trading Economics, 2013. Web. 20 Dec. 2013. Read More