Gulf weathers global financial crisis but oil did not

Ten years ago this month is taken by most economic commentators as the beginning of the global financial crisis, often labelled these days the “GFC”. When an event has its own acronym, you know it must be significant.
After months of worry about falling asset values, tighter credit conditions, and declining equity prices around the world, it was a relatively minor event at a French bank, BNP Paribas, that blew the whistle on global financial markets. 
The bank froze some $2.5 billion of assets, citing “evaporation of liquidity”, and that was that.
Within a few months, that $2.5bn would look like peanuts. Banks around the world had collapsed, or been bailed out to the tune of hundreds of billions of dollars.
The truly seismic shock came the following year, when Lehman Brothers, one of the true “blue blood” banks of Wall Street, went bust in New York.
It looked like the end of the world. Financial collapse and economic depression would spark a global conflict, it was suggested, in the same way the great crash of 1929 paved the way for the Second World War.
From the point of view of the Gulf, It seems strange to recall now that, as the liquidators were moving in to Lehman, economic policymakers and financial professionals were quietly congratulating themselves on how they had handed the crisis.
Certainly, credit conditions were tighter, and bank liquidity was low. But a series of measures by central banks and monetary authorities had shored up the system in the Gulf. 
Many had guaranteed deposits and injected liquidity and capital into the financial system; most cut interest rates to ease monetary conditions.
In any case, the energy exporters of the Gulf were in no way as badly off as their counterparts in the west. While American bank liabilities were secured against collapsing “toxic” assets, for example, Gulf banks had oil in the ground and cash in the bank.
But then came two events that showed the region, for all its capital and energy wealth, was not immune to the global contagion.
In May of 2009, the Al Gosaibi and Saad trading groups in Saudi Arabia went into financial nose-dive. Though there were special circumstances –  allegations of fraud, forgery and theft – the dual collapse showed liquidity was desert dry, especially for “name lenders”, which comprised a big proportion of credit in the Kingdom.
The banks took a potential hit of $20bn on the chin, but the affair, still rumbling on, left confidence brittle for years after.
Then, in November, Dubai World, the government-owned conglomerate behind much of the emirate’s glittering infrastructure, announced it could not meet pending liabilities running into tens of billions of dollars. 
Although billed as a “standstill” at the time, it was actually a technical default, though some commentators had problems understanding that. 
“Dubai World in fresh revamp” ran one local headline in the UAE.
International media and markets had no such problem. “Dubai shockwave hits global markets”, said the Financial Times as investors round the world sold off equities and government bonds. It was the beginning of the sovereign debt crisis that hit Europe a year or so later, and which is still acting as a drag on the global economy.
But, ironically, the damage done in the region by the Dubai debt crisis was less significant than its worldwide repercussions. Dubai, with little energy revenue but a thriving, though highly leveraged, commercial economy, was always a special case in the Gulf.
The UAE rallied round Dubai World with a $20bn loan, as did the emirate’s international bankers, who agreed to restructure the debts of it and other state-owned companies. No significant financial institution in the Gulf went bust because of the Dubai World crisis.
“Standing still, but still standing” was how the Economist described the situation. Citibank economist-pundit Willem Buiter wrote of the “intrinsic unimportance of Dubai World.”
That does not mean the GFC did not have a profound effect on the region, but it was in terms of the broader economic fall-out that the effects were felt. A region that lives on international commerce was badly shaken by the recession that followed the crisis. There was a wasted year in global trade before the Chinese pump-primed their economic system to take up the slack. Global trade levels have still not recovered.
The region has felt the ongoing effects in many areas. Credit has remained tight and bank lending has come under fresh regulatory scrutiny; the important real estate sector, which was severely hit in 2009, has yet to show a lasting recovery; equity markets jumped back quite quickly, but now appear stuck in the doldrums. 
But the true regional legacy of the GFC lies with the oil price. Always the region’s most important fundamental indicator, it collapsed in 2008 on fears of recession, recovered briefly in 2011 then collapsed again, and more seriously, in 2014, on oversupply worries. The real significance of the GFC for the Gulf was that it put an end to a decade of almost unbroken increases in the price of crude.