Global Financial Crisis and Equity Markets in Middle East Countries


Although there have been many financial crises in the history of the world economy, the financial crisis that occurred between 2008 and 2009 was one of the most influential. This crisis had a bigger magnitude and was of a different nature. According to Onour (2010), global market equities dropped to all-time low of 22% by the end of February 2009 from 51% in 2007. This was 56% drop in the value of equity markets, a situation, which had never been witnessed before. The level of risk exposure to this crisis of countries in the Middle East differed from country to country. Some countries in the region were affected more than others.

Countries such as Saudi Arabia, United Arab Emirates, Kuwait, and Qatar, which had been investing more actively in foreign assets such as bonds in the United States of America, were adversely affected by this decline in the value of stocks. Although only few banks in the Gulf Corporation dared to publicly admit they experienced losses as a result of this, facts show that many were affected as they invested heavily in equity markets. This spillover effect of equity markets affected many aspects of the economy of these countries (World Bank, 2011).

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Losses incurred were mostly caused by the risk of credit default, securities that were mortgage-backed, and structured investment vehicles. Other losses were associated with sovereign related funds. It is now apparent that capital markets in the Middle East are dependant on activities in the capital markets in the United Stated of America. This was the main reason why Middle East capital markets were significantly affected by the crisis in US markets (Zubair, 2010).

This crisis was worsened further by the negative impact that was a result of the fall in oil prices by approximately 50%. Dubai debt crisis that occurred in October 2007 did not make the situation any better. Debt crisis in Dubai created shock waves in all Gulf cooperation countries, affecting equity markets to a large extent. This was the point where share prices in Dubai dropped to a very low level with Gulf cooperation countries responding with a tightening of credit conditions of banks.

Fiscal Federalism in the UAE

The United Arab Emirates is a union of seven autonomous emirates, which collectively control hydrocarbon resources in the region. This union was formed in 1971 when all emirates came together as a sub-federal autonomy. Unlike other federal regimes, United Arab Emirates is a combination of autonomous states that, despite the union, still retain their international status and are free to formulate independent economic policies. The federal government of UAE, however, does not have an independent fiscal base and has continued to rely on Abu Dhabi for a fiscal base.

UAE Constitution allows each emirate to exercise power in all matters that are not within the jurisdiction of the federal government. According to the Constitution, all natural resources of each of these emirates remain the public property of the United Arab Emirates. As such, monetary policies and budgeting remain the responsibility of each emirate. Not all emirates have the same natural resources. Abu Dhabi and Dubai are the biggest contributors of revenue to the federal government, which depends on these contributions to support its operations.

For these reasons, Abu Dhabi remains in charge of defense and security, both of which are duties of the federal government. The structure of the federal government is highly decentralized, constituting 11% of United Arab Emirates government’s expenditure. The federal government is expected to ensure GDP growth and to take care of economic climate of the UAE. Other aspects that the federal government does not take care of are expected to be handled at the emirate level.

Foreign affairs, nationality, defense, and immigration issues are among the responsibilities of the federal government. The federal government is also in charge of health care, postal operations, communication systems, protection of the territorial waters, and labor relations within its jurisdiction. While the Central Bank of United Arab Emirates regulates monetary policies and exchange rates, the budget of each emirate is managed by individual emirate and the federal government has no mandate to interfere in this process.

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Emirate of Abu Dhabi generally dominates the United Arab Emirates. This is because this particular emirate contributes over 70% of the total revenue required by the government. With more than 90% region’s hydrocarbon reserves, Abu Dhabi remains the wealthiest and the most dominant emirate in the UAE. When compared to other emirates, Abu Dhabi has a wider fiscal space mainly because of rich hydrocarbon reserves.

While Dubai is one of the most diverse emirates, it lacks fiscal space and capacity to deal with financial shocks in equity markets. The first shortcoming of Dubai economy is that it heavily relies on real estate. It has also failed to diversify its revenue mobilizations like other economies. Research has shown that unless major changes are made, the Dubai debt crisis may become unsustainable in the nearest future.

Dubai Financial Crisis

One particular characteristic of the United Arab Emirates is that most economic processes are affected by personal decision making. As such, it has not been easy to develop genuine democracy. Absence of a democratic system of governance is the main reason why data on economic performance of these emirates is not easy to obtain. As such, it is not easy to analyze UAE’s economy objectively. The UAE is regarded as highly stable economy. Little data that is available indicate that it has vast natural resources that can only be compared to those of Iraq and Saudi Arabia.

Many factors other than the abundance of natural resources have contributed to the continued growth of UAE. Some of these factors include adequate supply of skilled labor from oversees, an environment that is favorable for business development, and a relatively stable political atmosphere. These are the reasons why the UAE has remained one of the economies that are growing really fast. The UAE is highly urbanized and has many big cities. Dubai is the biggest of these cities followed by Abu Dhabi. At the beginning, the UAE purely depended on oil but has since diversified its economy as a result of failing oil prices.

The problem began with a decline in the previously booming real estate economy, excess supply of which led to a crash in prices in Dubai. There was a 40% increase of supply and profit margins became extremely small. The federal government and the government of Abu Dhabi bailed Dubai out of their debt that became unsustainable by 2008. There were many perspectives at the debt crisis that hit Dubai with some analysts adopting a historical view.

According to Onour (2010), economic turmoil in the region was partially caused by the decision of Sheikh Mohammed to invest his wealth (and by extension that of the UAE) in US real estate market through Emaar, a real estate company. When Emaar, a very large real estate firm at the time, went bankrupt because of 2008 economic recession, the crisis hit the UAE as well. From the very beginning, the UAE has been a very stable economy largely dependent on oil reserves. The growth of the UAE has remained generally stable, occasionally fluctuating due to changing oil prices. Despite all these factors, the economy remains one of the richest in the world with well-developed infrastructure.

These three articles have similarities in their approach to Dubai debt crisis. All authors seem to provide possible solutions and outline lessons to be learnt from the crisis. It is generally proposed that a disaggregated approach should be taken to achieve fiscal sustainability. Because of the decentralized nature of UAE’s federal structure, financial decisions are often left to few individuals. This could lead to errors in judgment. The authors propose that the federal government should consider the fact that all emirates do not have equal resources and every emirate should be supported to be self-sustaining.

There is a general need for change of policies in Dubai to solve the problem related to the debt. Dubai has also been found to have a narrow resource base when compared to other emirates. Diversification is, therefore, needed for more fiscal space. While increasing the revenue of Dubai through increase in value-added tax may be a good option, there is a need for a national initiative for greater success (Zubair, 2010).


In conclusion, Dubai in particular and the UAE in general could benefit significantly from a mid-term fiscal framework that is based on rules. This framework should diversify revenue sources instead of relying purely on hydrocarbon. For the government to avoid such crises in the future, it is important to create a well coordinated and improved policy implementation regardless of whether the leadership is rule based. These policies would create a sustainable base for the economy in order to ensure stability in all emirates.

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