**5. A comparative analysis of the effects of the global financial markets and global financial crisis on Arab economies**

Arab economies were exposed to the global financial crisis and the consequent stagnation in the economies of the majority of developed and developing countries during the years (2008 and 2009) [2].

The main channels through which the effects of the crisis spread to the Arab countries varied, according to the nature of their economies, the degree of openness and their connection to the global economy. For analysis, the Arab countries, which are characterized by financial systems, can be classified into three groups. The first group, (Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), which is the Gulf Cooperation Council (GCC) countries, is open and trade with high exposure to global financial markets, and its close connection with both the global financial system and global markets for commodities, especially oil and gas Petrochemicals were the main channels for the global crisis to spread to, so the local financial markets in them are not directly linked to the global markets, except for their economies [4].

As for the second group, (Algeria, Sudan, Libya and Yemen), their economies depend on oil revenues, and therefore global demand and global oil prices affect the financial policy significantly. The practices followed in these countries and keeping with the global economic cycle, that is, government expenditures rise with the increase in oil revenues and decrease with the decrease in those revenues, in most of those countries [4].

They are countries in which the banking and financial sector depends on domestic lending resources, and thus the third group (Palestine, Jordan, Tunisia, Syria, Lebanon, Egypt, Morocco and Mauritania) whose economies are not directly affected by the fluctuations of global financial markets [4].

External shocks, on the other hand, are communicated to their economies through their tight trade ties with developed country markets and their key trading *Perspective Chapter: International Financial Markets and Financial Capital Flows... DOI: http://dx.doi.org/10.5772/intechopen.102572*

partners in the European Union and the United States. In terms of commodity transactions, these countries' exports are heavily reliant on developed-country markets. This is in terms of service transactions like tourism receipts, worker remittances, and foreign direct investment flows.

The fluctuations of the economic cycle and growth rates in developed countries, in light of the stagnation resulting from the crisis, lead to the risks of slowing growth in the third group countries, through the decline in the performance of their export sectors with high exposure to the markets of developed countries, and the decline in financial flows to them through the decline in revenues and the volume of tourism and remittances Overseas workers and foreign direct investment [10].

Regarding a comparative analysis of the effects of the crisis on Arab economies according to the three groups mentioned, the extension of the crisis is attributed to two main things, the first of which is financial factors related to the degree of exposure of the banking and financial sector in the economy to global financial markets, and the second is the commercial factors that are related to the main trading partners of Arab countries [11].

#### **5.1 First group countries**

The most important conduits for the crisis to extend to the economy of the Gulf Cooperation Council countries were financial factors connected to exposure to global financial markets. The (GCC) countries saw a boom in financial resources in the years leading up to the crisis, owing to large increases in oil income and foreign capital flows to finance significant projects in a number of these countries, as well as an expansion of bank credit to the private sector.

The financial surpluses of the (GCC) states shrank, as did the cash liquidity of the banking and business sectors, as well as the outflow of foreign financial flows, which entered the Gulf financial markets for speculative purposes, and as a result, investor confidence declined.

These circumstances coincided with a lack of liquidity in global markets, leading several (GCC) countries to reduce their reliance on external financing for major projects in their countries, as well as the fact that many loans owed to international financial institutions during the crisis needed to be refinanced, resulting in several (GCC) countries reducing their reliance on external financing for major projects in their countries. Several public and commercial sector enterprises and institutions were at risk of being reinstated (as happened in the Dubai debt crisis) [8].

The rescheduling of outstanding debt, the rise in financing costs, and the fall in investments in financing real estate development projects and the purchase of real estate projects have all contributed to the postponement of many real estate development projects. According to international reports, the total projects that were under implementation at the end of (2009) were expected to be around \$575 billion, compared to the entire projects that were under implementation at the end of (2008), which were anticipated to be around \$5.2 trillion (2008) [9].

This resulted in a drop in local demand for real estate, as real estate values fell, significantly affecting the value of real estate assets held in Gulf banks' investment portfolios. Because of these developments, the climate of uncertainty grew, and commercial banks implemented risk-reduction and capital-base-supporting policies, prompting banks to tighten lending conditions, resulting in a dramatic drop in bank credit growth [8, 9].

Declining growth in the non-oil and business sectors, also confirmed by the decline in the money meter (money and quasi-money). After the money stock recorded a growth rate of about 10 percent in the period (2002–2005), its growth accelerated during the economic boom period (2006–2008) to reach about

19 percent, but the growth rate of the money stock declined sharply after that and until the end of (2009) [4].

The repercussions of the global crisis were evident in the wake of the bankruptcy of the investment bank (Brothers Lehman) in September (2008), as global stock market indices declined as a result, and the impact was evident for the stock markets in the (GCC) countries. Losses in the market value of the Gulf markets are estimated at 41 percent or more. The equivalent of \$400 billion during the period September–December (2008). The Gulf stock market indices were subjected to several fluctuations, and the Gulf stock market contagion with the global crisis became visible. (P500 & S) Before and during the crisis the trend of the correlation coefficient shifts from an inverse relationship before the crisis to a parallel (Direct) relationship during the crisis [8].

Gulf banks, on the other hand, were able to post reasonably solid financial performance towards the end of (2009), after absorbing some of the crisis' losses. As a result, the banking sector in all GCC countries maintained high capital adequacy rates before and during the crisis, and the increase in non-performing loans as a percentage of total loans had no significant impact on the banking sector's financial results at the end of (2009), as the sector achieved net profits, albeit at a much lower level than before the crisis [4].

The Gulf banking sector has also dealt with the systemic risks arising from the crisis, in addition to the implementation of quick practical measures by the official authorities in the (GCC) countries to support the safety and stability of the local banking and financial sector. Some of these measures came to support the banking and financial sector's liabilities side, by injecting capital in the balance sheets of banks, as was the case in the Emirates and Qatar, where the value of paid-up capital amounted to 2 percent and 3.7 percent of (GDP), respectively [11].

The monetary authorities in the (GCC) states have provided facilities and loans to the banks operating in them, in addition to the official authorities in Qatar supporting local banks with "Assets", by purchasing investment portfolios with local banks, whose value has fallen sharply in light of the decline in the Doha Securities Market indices [22, 30].

The total purchase value amounted to about 6 percent of the Qatari (GDP). Supporting the "asset" side of these banks aims to improve the quality of their assets and provide the necessary liquidity with local banks, in addition to restoring confidence in the local stock market. In addition, the Emirates, Qatar and Kuwait took decisions to guarantee deposits with local banks. This is in addition to the monetary authorities in the (GCC) countries in general facilitating the use of monetary policy tools to enhance liquidity in the banking sector by reducing the mandatory reserve ratios [12].

Within the framework of stimulating economic activity, Saudi Arabia took the initiative to implement a plan to stimulate and revive the national economy, by approving investments worth \$400 billion over the next five years. It is worth noting in this regard that the allocations for the stimulus program are among the highest allocations in the stimulus programs applied by the Group of Twenty (G20) countries. Several other (GCC) countries have also backed infrastructure spending to boost aggregate demand, which helped support the non-oil sector's development in (2009), albeit at a slower pace than in prior years [6].

#### **5.2 Second group countries**

The local banking and financial sector in the countries of the second group (Algeria, Sudan, Libya, and Yemen) was unaffected by the global financial crisis because it was more closed and not directly linked to it, as (Algeria and Sudan) were not exposed to market value fluctuations due to the small volume of trading *Perspective Chapter: International Financial Markets and Financial Capital Flows... DOI: http://dx.doi.org/10.5772/intechopen.102572*

and the lack of a stock market in the countries of the group, the number of companies listed in it [4].

However, the economies of the group's countries were affected by the decline in demand for oil resulting from the stagnation in the global economy because of the global financial crisis. In addition, both (OPEC) members Algeria and Libya reduced their production quotas during (2008 and 2009), in implementation of the (OPEC) decision to reduce production quotas. Because of these factors, the volume of oil exports to the group's countries declined by 28 percent on average in (2009), compared to a decrease of 2 percent in the year (2008) [51–53].

On the other hand, the economies of the second category have seen a significant increase in non-oil sector activity, particularly in Algeria and Libya. In the case of Algeria, the non-oil sector grew at a healthy rate, owing to a large increase in the agricultural crop of cereals, as well as the continuation of high public spending on infrastructure development under the National Infrastructure Development Program, and the accumulation of oil surpluses before the onset of the crisis. The non-oil economy in Libya has grown rapidly because of increased government spending on infrastructure projects and increased foreign direct investment in Libya to implement infrastructure and construction projects [4].

As for Sudan and Yemen, the non-oil sector recorded high growth rates, similar to Algeria and Libya during the oil boom, albeit at a slower pace, in light of the availability of oil revenues before the outbreak of the crisis [55].

However, the decline in oil revenues due to the drop in international oil prices had a negative impact on non-oil economic activity. In Sudan, for example, the nonoil economic activity declined from a growth rate of 8 percent during the period (2006–2008) to about 8.3 percent in (2009).

This is attributed to the decline in foreign investments to Sudan, in addition to internal factors, some of which are related to the state implementing Measures to reduce import demand in light of the sharp decline in external reserves resulting from the decline in international oil prices.

#### **5.3 Third group countries**

The limited exposure to the global financial markets of the local banking and financial sector in the third group countries (Palestine, Jordan, Tunisia, Syria, Lebanon, Egypt, Morocco and Mauritania) has reduced the direct effects of the global financial crisis on these countries.

However, the economies of the group's countries are closely linked, the economic activity and demand in the developed countries, in terms of commodity transactions, represented in the concentration of export trends of a number of the group's countries to the markets of the European Union and the United States, as well as on the side of service and capital transactions represented in remittances of their workers abroad, tourism revenues and the flow of foreign direct investment [4, 6].

Therefore, the contraction in demand in the countries of the European Union and the United States, and the entry of the global economy into a period of stagnation, had a negative impact on the exports of the third group countries, and on the flow of foreign direct investment to them [34].

In general, the local banking and financial sector in the group's countries was able to avoid the severe negative effects that several emerging economies witnessed during the global financial crisis, because the foreign transactions of local banks in the majority of the group's countries are subject to restrictions on the freedom of capital flows.

The private sector has specific ceilings for investment abroad to reduce the exposure of its foreign assets to high investment risks, such as what the global financial markets witnessed during the crisis.

On the borrowing side, most of the group's countries' banks and financial sectors rely on domestic savings and financial resources. Even before the crisis, the stock markets of the third group countries were unaffected by global stock market fluctuations because the vast majority of local stock market investors are individuals from the group's countries, with only a small amount of institutional foreign investment in a few high-liquidity markets [31].

However, the developments in the global stock markets since the exacerbation of the global crisis in the last quarter of (2008) negatively affected the stock markets of a number of the third group countries due to the fluctuations in the international markets.

Including European in particular. For example, the trend of the correlation coefficient of the stock market indices of the group countries with the French stock market index (CAC40) shifted from an inverse relationship before the crisis to a parallel relationship during the crisis [2].

In terms of external financing, given the scarcity of global liquidity and the resulting rise in the cost of the loan in global markets, several third-group countries were able to fund their budgets from domestic financial sources, where domestic liquidity grew at a rather fast rate. The government's borrowing from the local market corresponded with a drop in the growth of bank loans to the private sector, which can be linked to global demand and supply dynamics [4].

Because of the reduction in foreign demand and the decline in global trade, demand for bank lending has decreased. Furthermore, the uncertainty created by the global crisis in local markets prompted commercial banks to adopt a precautionary policy, which entailed not squandering the resources at their disposal to avoid an increase in the number of cases of default and failure to repay, despite the availability of liquidity [21].

The repercussions of the global crisis on bank lending to the private sector were more visible in Palestine, Jordan, and Egypt, which saw a considerably greater decrease in bank credit to the private sector during the crisis (2008 and 2009). Following the implementation of the monetary authorities' strategy that supports stabilizing the value of the shekel and the dinar versus the dollar, the economy in Palestine and Jordan was subjected to interbank liquidity pressures [4, 21, 31].

The Palestinian and Jordanian financial markets have been affected by the exacerbation of the global crisis since the last quarter of (2008). As for Egypt, the growth rates of bank credit to the private sector were weak before the crisis, in light of the restructuring of the banking sector its assets and reducing the proportion of non-performing loans. With the decline in economic activity due to the crisis, the growth of bank credit to the private sector stopped, recording a negative rate at the end of (2009) [4, 6].

Given the early structural reforms in the banking sector implemented by the third group countries before the crisis's repercussions, the banking sector in a number of the group's countries was able to achieve good performance before the crisis by increasing the adequacy of risk-weighted capital and lowering the average ratio of non-performing loans to total loans.

The banking sector in these countries canceled numerous problematic loans whose value was fully covered by provisions, resulting in increased efficiency and profitability in a number of them, as it achieved relatively good returns on assets and shareholders' equity. In general, the banking sector's performance in the group's nations was unaffected by the crisis (2008 and 2009) [4, 6, 21].

However, the economic activity in the third group countries was affected by the decline in external demand, as their exports declined the remittances of workers abroad and the flow of foreign direct investment declined, while the tourism sector witnessed a slight improvement.

*Perspective Chapter: International Financial Markets and Financial Capital Flows... DOI: http://dx.doi.org/10.5772/intechopen.102572*

The intertwining of the export sector with the rest of the production and service sectors, including the banking sector, reflected in the pace of economic activity in the group's countries, necessitating the intervention of the authorities in the group's countries to take quick measures to facilitate the management of monetary policy and increase public spending through economic stimulus programs and revitalization [6, 21].

In this regard, it is possible to shed some light on the efforts made in several countries in this group. In the field of monetary policy, Jordan, Tunisia, Egypt and Morocco reduced the interest rates approved by monetary policy, to urge commercial banks to increase lending to the private sector. For example, the monetary authorities in Egypt reduced the overnight deposit rate six times during the period February–September (2009), bringing the cumulative reductions to 325 basis points [2, 4].

The monetary authorities in Jordan reduced the monetary policy interest rate three times during (2009), by 50 basis points each time. All the countries of the group have reduced the mandatory reserve ratio, opened new lending facilities, provided more liquidity to the banks operating in them, and provided guarantees for bank deposits [6, 21].

In the field of fiscal policy, Tunisia and Egypt implemented a comprehensive package of measures to increase public spending and stimulate economic growth, as represented by investing in infrastructure and education projects, providing support to private sector institutions that generate new jobs and supporting exports by increasing the guarantees available for exports [2, 9, 10].

Palestine, Jordan, Syria and Morocco increased public spending on investment in several development projects.
