1. The Macro Setting

The global financial crisis, triggered by the collapse of Lehman Bros., led to wholesale liquidity freeze, equity market collapse, volatility and spread spikes, and fall in industrial production all leading to loss of investor confidence. From that situation, we are now slowly limping back to normalcy even though smaller episodes such as in Greece keep the tension alive. The GCC region was believed to have avoided the recession due to certain factors such as weaker integration with the global economy, timely policy response and possession of adequate resources to sustain domestic demand.

The GCC region enjoys one of the highest rates of economic growth backed by a surplus generated over the years thanks to high oil prices. Oil accounts for nearly 50 percent of GDP and 80 percent of export revenues of the region. Hence, the boom in oil prices throughout the 2000s resulted in the swelling of surpluses both in current and fiscal accounts. While the previous oil boom in the 1970s generated similar surpluses, it was channeled more outside the region (predominantly in treasury investments), while this time around it was channeled inward leading to high levels of credit growth which fuelled inflation and asset price bubbles (both in real estate and stock market) leading eventually to the bursts when the global financial crisis erupted. The immediate impact of the crisis was a steep fall in the oil price. The rapid credit expansion during the boom years had been aided by the growth of external financing in certain markets like Dubai, which evaporated during the meltdown. This increased the risk perception of the region with CDS spreads widening as high as 830 bps for Dubai at one point in time, though it was more specific to defaults related to Dubai entities. In response, the GCC governments enacted various measures including deposit guarantees, provision of liquidity, and monetary easing to a large extent. According to a Booz & Co report, the Saudi plan was one of the largest worldwide relative to overall GDP, representing 10.3 percent of the country's 2008 GDP. The two successive UAE support packages, totaling Dh120 billion, exceeded 12 percent of 2008 GDP.