Les crises financières

Crises, development policies and diversification in Arab Countries

The global financial and economic crisis, the Euro Zone crises and the Arab Spring highlighted the concentration of Arab economies and their dependence on too few sectors and export commodities. This dependence makes them highly vulnerable to crises that can lead to fluctuations in global demand and commodity prices and reinforce the need for diversification.

The production equipment and export structure of the Arab countries is not conducive to long-term growth, because: the Specialization discourages the allocation of the productive resources – such as oil – to more diversified industrial activities. Further, in non-oil exporting countries often involves products with limited added-value (textiles, clothing, agriculture).

Diversification has been on the agenda of both oil exporting and oil importing countries for many decades. Crises increased the urgency of diversification.

1. The vulnerability of Arab countries to the crises:

Vulnerability is the likelihood of been negatively affected by a sudden shock; Essers (2013) defines vulnerability by the following formula: Vuln = prob shocks * (exposure -  resilience)

Given that the probability of shocks is increasing, Arab countries have to reduce their exposure to shocks and/or increase their resilience in order to reduce their vulnerability to external or internal shocks. To deal with vulnerability, four strategies are possible:

Strategy 1:  Arab countries can do nothing and deal with the consequences of the shock after it has occurred

Strategy 2:  Arab countries can choose to take preventing measures and reduce their vulnerability by reducing their exposure to shocks.

Strategy 3: Arab countries could increase resilience by self-insuring against shocks.

Strategy 4: Arab countries could use market insurance and hedging to reduce risks.

1. The impact of the crises and Arab countries policy responses:

Crises affecting Arab countries:

• 2008: global economic and financial crisis: Unsustainable US housing bubble with an increase in subprime mortgage loan default rate, growth of an insufficiently regulated financial system and financial institutions taking on too much risk led to the worst crisis since the great depression.
• 2009: the EU sovereign debt crisis: High deficit levels in some European countries eroded investor confidence and led to an increase in bond spreads. Investors feared that the fiscal positions and debt levels of a number of Euro Zone countries were unsustainable, which led to loss of confidence and drop in output.
• 2011: Arab Spring: Popular dissatisfaction and a strong desire for jobs and dignity led to uprising in many Arab countries increasing economic and political instability.

The impact of the crises on Arab countries:

The global financial crisis, the Euro zone sovereign debt crisis and the Arab Spring (Arab countries in transitions) impacted economic and political stability, the fiscal situation and the prospect of growth of Arab countries. The impacts are specific for each country but we can differentiated between oil importing and oil exporting economies.

The impact on oil exporting economies: Drop in stock markets indices - Loss of overseas investments - Drop in real estate prices - Deterioration of bank asset quality - Strain on public finance due to crisis-related rescue and stimulus expenditures - Increase in sovereign debt levels in some countries.

The impact on oil importing economies:  Slowdown in economic activity - Deterioration of external and fiscal accounts - Decrease of reserves - Increase in political risk - Banks had little direct exposure to the toxic products Capital-market contagion effects were limited - Other transmission channels of the crises: trade, FDI, remittances, migration.

Arab countries responses to the crises:

The economic and political situation of most Arab countries right before the global financial crisis was thanks to many years of adjustments favorable enough to permit the adoption of numerous measures to mitigate the effects of the crisis right after the 2008 crisis. The policies changed overtime and lost momentum with additional strain on fiscal situation and a reduction in the capabilities of countries to respond to new shocks.

Most of the responses in the Arab countries were attempts to handle with the consequences of the crises :

• Creation of committees following up on the crisis (Morocco, Jordan, Saudi Arabia)
• Increases in public spending and rescue packages (Egypt, Jordan, Libya, Mauritania, Morocco and Tunisia, GCC economies)
• Support to industrial sectors (Egypt, Morocco, GCC)
• Support to the private enterprises through tax exemptions (Egypt, Morocco, Tunisia)
• Increased dialogue with the social partners (Jordan, Bahrain)
• Salary increases for civil servants (Kuwait UAE, Algeria, Lebanon, Libya, Morocco and Tunisia)
• Minimum wages increases (Jordan, Lebanon, Morocco and Tunisia). 
• Delays in the start or implementation of some projects (Algeria, Libya, Kuwait, UAE)
• Abandon of some projects (Bahrain)
• Reduction of subsidies

1. Can diversification be a response to the crises?

Introduction to Financial Crises

1. What is the financial system?

Financial system is the institutions in the economy that facilitate the flow of funds between savers and investors, the financial system includes:

• Financial markets: like the stock market: through which households directly provide funds for investment
• Financial intermediaries: like banks or mutual funds:  through which households indirectly provide funds for investment.

The stock market is the market where common stock representing ownership in a company, are traded.Companies initially sell stock (in the primary market) to raise money. But after that, the stock is traded among investors (secondary market).

The foreign exchange market is where international currencies trade and exchange rates are set.

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