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  • 1. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 ABSTRACTEconomic globalization is an unavoidable trend. Financial liberalization to integrate into the internationalfinancial community is an aspect of globalization. Many Middle-East countries had begun this process witha view to attract capital for economic development. The unexpected onset of the recent global financialcrisis made these countries reassess the state of their financial systems as well as the pace and thesequence of financial liberalization. Due to its geographical location and increasing economicinterdependence, Middle-East countries could not avoid the impact of the global financial crisis. This studylooks at assessment of the strategic planning among Middle-East financial institutions is facing andidentifies the impact of financial crisis in Middle-East countries. Practical solutions for overcoming the globalfinancial crisis are outlined. ~1~
  • 2. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20SCOPE OF THE STUDYFinancial institutions in the Middle East are being urged to implement strategic planning fast as a means tocombat the global slump and ensure survival in the face of intense regional competition. This study can bedivided in three categories. First it focus on the strategic planning among the middle east countries, secondthe impact of the global financial crisis over the middle east financial institutions and the last part is thestrategies that followed to overcome the impact of the crisis. The impact has been classified in few sectorsto differentiate the problems that the countries facing in all terms. According to the impact mentioned, thesteps to overcome to impacts are determined. After that, there are a brief discussion about the impact ofthe global financial crisis to the Middle East countries and the findings/strategies on how to overcome theimpact of the global financial crisis to the Middle East financial institutions. As there are some risk taken toovercome the impact of the global financial crisis to the Middle East countries, so it cause for somedisadvantages for the countries. ~2~
  • 3. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20OBJECTIVE OF THE STUDYThis paper intends to study about the strategic planning among Middle-East financial institutions is facingand overcoming the impact of global financial crisis. The first section of the study will analyze the impact of the global financial crisis towards Middle East financial institutions. The second section of the study will present about the strategic planning used among the Middle East financial institutions. ~3~
  • 4. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20INTRODUCTION I.) Impact of the global financial crisis in Middle east financial institutionsGlobal financial crisis give a variety impact to the Middle East financial institutions. Around in the 10thcentury the Middle east economic was economically advanced region of the world and it will be measuredby standard of living, technology, agricultural productivity and others. This scenario has been changed in2007 and the early part of 2008, rising oil prices lined the coffers of major exporters like Saudi Arabia, theUnited Arab Emirates, Iran, Kuwait, and Iraq. The first impact of global financial crisis is reduces of oilprices and global liquidity shortages. Basically, most of the GCC country faces with decline in oil prices andproduction, as well as by liquidity shortages in global financial markets. The direct impact from U.S.subprime assets, however, was limited, given a relatively low direct exposure of GCC commercial banks tothese assets. Oil market developments affected government finances and external positions directly, butthey also had an indirect impact on banking and corporate liquidity and funding costs as speculative capitalinflows reversed and investor confidence in the GCC declined. This will together with global liquidityshortages, course a sudden fall in asset prices and weakened financial systems’ balance sheets, promptinggovernments’ intervention in the financial sector. The second impact was Pressures on bank funding and liquidity led to tight credit conditions. Theturnaround of speculative short-term inflows linked to exchange rate speculation, combined with globaldeleveraging and widening emerging market spreads, resulted in significant liquidity pressures andincreased funding costs. Commercial banks drew down their reserves with central banks, and short-terminterest rates spiked sharply, although temporarily. Timely response by the authorities, including throughthe infusion of liquidity and deposit guarantees, helped stabilize interest rates and liquidity conditions. Next is Changes in the fund investment strategies. Due to the global financial crisis in Middle Eastfinancial institutions the investors have been change their investment strategies. In the other hand, somefunds are opting for more conservative strategies, such as SAMA (Saudi Arabian Monetary Agency), theSaudi Sovereign Wealth Fund Institute. Those countries are traditionally focused on financial markets inEurope and the U.S. are turning their attentions towards other markets - in Arab countries and emergingones, as well as towards direct investments. For example, in 10 January 2009 the Abu Dhabi InvestmentCompany announced to create four investment funds in the Middle East and North Africa. Last but not least were repercussions for stock markets and the Arab financial system. The hugelosses recorded by both supreme wealth funds and private Arab capital in financial markets in the United ~4~
  • 5. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20Kingdom and the United States meant that the stock market crash in September 2008 affected the majorityof the Middle Eastern stock markets. After the bankruptcy of Lehman Brothers was announced, onSeptember 15th 2008, the Saudi Arabian stock market fell by 6.5%, Doha 7%, Kuwait 3% and Abu Dhabi4.35%.Certain markets, such as Kuwait, had to close for a number of days to avoid outbreaks of panic.Over the last year, falls in these Gulf stock markets have followed a parallel path to those in Europe andNorth America and are strongly linked. II.) Lessons learn from the global financial crisis towards middle east financial institutionsNow let us see what are the lessons did Middle East countries learns from the global financial crisis? Firstfor the political leadership the lessons are Lack of regulation is as bad as over-regulation. Although theybelieve governments should not regulate free market choices, they also believe investors should regulate toprotect investors against conflict of interests and negligence by investment bankers. Regulations shouldalso ensure full transparency and disclosures and should effectively penalize violators. To be more specific,investment banking firms who knowingly sold investments to their clients and later betted against themwithout informing the same clients; those who invested in fraudulent funds without proper due diligence onbehalf of their clients; and rating agencies that miss-rated subprime junk derivatives as grade A assets. Second was Insanity is defined as doing the same thing and expecting different results. Hiring thesame people who got us into the economic recession in the first place or hiring those who did not foreseethe financial crisis to design the recovery policies is not the right solution. Most of the economic advisorsdid not see the crisis until it was too late and some of them participated in the policies that led to the crisisin the first place. Third was the country pay a big price not only for their wrong economic policies, but also for wrongforeign policies. Countries that allow foreign lobbies, special interest groups or extreme nationalistmovements to dominate their foreign policies by becoming active participants in international conflicts willend up creating more enemies and wasting their valuable resources in defending their own security.Countries that try to spread their ideologies by force, be it religion, socialism, capitalism, democracy orsomething else, will be overwhelmed by the human and economic cost of conflicts. Those countries will lagbehind other countries that are focusing on developing their economies and advancing their interests viaglobal partnerships and trade. ~5~
  • 6. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 As an overall the lesson should be strengthen strategic thinking by place more emphasis onscenario planning, trends analysis and client/ market listening. Institute strategic planning cycle make theprocess more regular and important inside the organization. Make a stronger connection to resourceallocation by ensure that strategic plans allocate resources and connect to budgets. Increase leadershipengagement: more visibility and direct involvement in the strategic planning process by senior leaders.Improve strategic action: enhance operational execution through better change and performancemanagement as well as overall communications. III.) Define strategic planningStrategic planning is an organizations process of defining its strategy,or direction, and making decisions onallocating its resources to pursue this strategy. In order to determine the direction of the organization, it isnecessary to understand its current position and the possible avenues through which it can pursue aparticular course of action. Generally, strategic planning deals with at least one of three key questions."What do we do”? , For whom do we do it?" "How do we excel?”. The linkage between global financial crisisand Middle East are institutions that used strategic planning to make critical decisions were better able topursue growth opportunities during the crisis. Institutions that relied on strategic planning during the crisisare more confident about their prospects for near-term growth. Institutions employing a regular strategicplanning process and cycle were more prepared for the economic crisis. Institutions that involve the entireexecutive team in strategic planning expect revenue growth over the next 12 months. The recovery of oil importers in MENA will depend crucially on their key markets, especially theEuropean Union (EU) and the GCC countries. The feeble recovery expected in the Euro zone will dragdown growth in the near term, particularly the growth of those with strong links to EU markets. Growth of oilimporters is expected to decelerate slightly to 4.5 percent in 2010.Trade is recovering, with export revenueof oil importers expected to grow by 7.7 percent in 2010, after contracting by 13 percent in 2009.Remittance flows are expected to grow by 1.3 percent in 2010, albeit this pace is much slower than the oneobserved during the pre crisis years. The crisis has not led to any major reform reversals, except perhaps aslowing of food and energy subsidy reforms, which have generally been very slow to progress. Somecountries have steamed ahead with the reforms started prior to the crisis. These include the financial sectorreform in Egypt and trade integration in Tunisia For the circumstances as mention above, the GCCcountries used a long-term growth planning on the recovery of the financial crisis such as formation of Gulf ~6~
  • 7. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20Cooperation Council, Steadily Increase Oil Production, and Maintain a long-term demand for oil at theexpense of alternative energies.LITERATURE REVIEWThe world doomed to recession in the year 2008, and what are the causes of these unlikely event; well as itis the global financial crisis that hit on the globalized world which has originated in The United States andextended to the rest of the world in 2008 led to massive destruction of economy. According to;Ramadhan.M and Naseeb.A 2009 in their Journal the Global Financial Crisis: Causes and Solutions; thelikely events of the crisis tend to be caused by Imbalance in World Trade, Consumption Pattern in the U.S,Excessive deregulation of financial market, and the dominant role of the U.S dollars. The first clear sign thatthe US housing bubble was bursting, the mid-2007 crisis in the sub-prime mortgage market (stemming fromthe significant increase in defaults), transmitted losses to a whole set of securitized financial products suchas mortgage-backed securities (Lin, Senior Vice President and Chief Economist The World Bank; 2008).Hence, the lack of supervision of the financial markets has caused the mortgage bubble motivated anabruption of crisis which led to indebtedness or bankruptcy among the banks in U.S and throughout theworld. Therefore the Middle-East financial institution is not left behind in this mounting crisis.The Impact of Global Financial Crisis to the Middle-East Countries’ Financial InstitutionThe impact in Middle East is said to be not impulsive, according to Kouame. A 2009, the Acting ChiefEconomist for the MENA Region in an interview of Q&A of the global financial crisis and MENA he statedthat; Although financial systems in MENA countries have not been highly vulnerable to the crisis so far dueto their limited integration with global financial institutions, the impact of the global recession on the realeconomy can be significant in many MENA countries. As a whole, the MENA region is projected to grow at3.3% in 2009 down from 5.5% in 2008. This is a significant mark down. However, MENA is expected to beless impacted by the global recession than most other developing regions, notably Eastern Europe &Central Asia, and East Asia & Pacific. Regarding the impact of the global financial crisis, (Larbi .H 2009)from the Quarterly Publication - The World Bank Middle East Department has clarified that one commonfactor among Middle-East countries was that the initial impact of the global financial crisis on their financialsystems was muted. Habibi.N 2009 articulates that in terms of integration into global financial markets, theMiddle East falls behind all other emerging-market regions other than Africa; but although a lower level of ~7~
  • 8. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20financial integration is a disadvantage under normal circumstances, it can protect an emerging region whenthe global economy sinks into a severe financial crisis. Subsequently, he also further clarifies that Middle-East region is affected by global economic conditions through fluctuations in the oil market. The globalcrisis sharply reduced the flow of foreign investment into real estate; as a result, the uptrend in real estateprices in the Middle East, which had lasted for several years, came to an end in 2008. This developmentput severe pressure on real estate construction firms and encouraged sell-offs in regional stock markets. Inturn, the end of real estate speculation sharply increased mortgage defaults, and as a result many listedcommercial banks came under financial distress. To adhere the impacts of the crisis on the Middle Eastcountries financial institution; the introduction of Gulf Cooperation Council (GCC) is crucial because thereare huge number of countries of Middle East is participating in the council. Meaning to say, if the crisisaffects GCC it distresses the ME-countries itself. GCC is a political and economic union of the Arab statesbordering the Persian Gulf and located on or near the Arabian Peninsula, namely Bahrain, Kuwait, Oman,Qatar, Saudi Arabia and United Arab Emirates, Jordan and Morocco. Therefore the first massive impactwould be fall of oil prices in late 2008, leaving many oil exporters struggling under the weight of debt theyhad assumed during oils run-up. In Middle Eastern countries without major crude supplies, the crisis poseda threat more humanitarian in nature: It challenged their abilities to pay off international debts and strainedinternational aid institutions. Thus in the article of Khamis .M & Senhadji.A 2010; they anticipated that theglobal economic crisis took hold, the GCC countries were affected through trade and financial channels. Bythe second half of 2008, GCC government finances and external positions were directly affected by thedecline in oil prices and demand. At the same time, GCC countries underwent reversals of speculativecapital inflows experienced in 2007 and early 2008. These developments tightened liquidity conditions andaffected investor confidence, and were further exacerbated by Lehman’s collapse in September 2008 andthe ensuing global liquidity shortages and deleveraging. GCC financial sector imbalances came to the fore,especially in the United Arab Emirates (U.A.E.), Kuwait, and Bahrain, given these countries’ close linkageswith global equity and credit markets. There are several categories of impact on the financial institution ofMiddle East classified in the article of (Rocha.R et al 2011); such as Impact on Regional Equity and BondMarkets, Impact on Regional Banking Systems, and Impact on Islamic and Conventional Banks. • Impact on Regional Equity and Bond MarketsMENA stock markets reacted to the global financial crisis with a lag in comparison to markets in high-income and other emerging economies: as a result of high oil prices, they held up better than markets ~8~
  • 9. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20elsewhere until the third quarter of 2008. However, both the GCC and non-GCC stock markets crashedwith other stock markets around the world during the worldwide panic in the fourth quarter of 2008,following the bankruptcy of Lehman Brothers. The fall of stock prices in the GCC was more pronounced,reflecting the burst of the real estate bubble and the sub region’s greater openness relative to other parts ofthe region. The impact of the global financial crisis on the region’s sovereign debt broadly mirrored globaltrends, with a sharp spike in credit spreads as a reaction to the Lehman bankruptcy and a rapid decline asthe panic subsided. • Impact on Regional Banking SystemsIn the run-up to the financial crisis, credit growth had been on an upward trend in all three MENAsubregions. The GCC credit expansion has caused a large component of real estate lending and in somecountries increasing reliance on foreign funding; which seem to accelerate during most of 2008, in contrastwith trends in other regions. With the collapse of asset and commodity prices and the freezing of financialmarkets, the crisis reached emerging economies and led to a sharp slowdown in lending in virtually allMENA countries, especially those in the GCC. The very sharp credit slowdown in the GCC reflected notonly reduced oil inflows but also restricted access to foreign borrowing and domestic banks’ curtailing ofreal estate lending. The prompt and forceful reaction by the GCC authorities included fiscal stimulus,monetary easing, and exceptional measures to support the financial sector (Khamis and Senhadji 2010).Apart from credit growth being affected, the Resiliency of banking sector is also being disturbed. Standardindicators of banking system soundness and the lack of systemic consequences underscore the resiliencyof MENA banking sectors to the global financial crisis. Banking systems in GCC countries were highlycapitalized in the precrisis years, and capitalization increased further in 2009. The regional political crisisand the unwinding of countercyclical measures will test the resiliency of emerging MENA banking sectors.There has been significant disruption in economic activity in countries experiencing long protests andturmoil. These disruptions will lead to reduced lending activity and deteriorating asset quality andprofitability of banks, to different degrees across countries. • Impact on Islamic and Conventional BanksThe financing activities of Islamic banks are tied more closely to real economic activities, Islamic banksavoided direct exposure to exotic and toxic financial derivative products and Islamic banks in general kept alarger proportion of their assets in liquid form. As the global financial crisis turned into a global economic ~9~
  • 10. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20crisis, Islamic banks and financial institutions started to be indirectly affected. The business model of manyIslamic banks—which relied on murabaha financing and invested predominantly in the real estate sectorand in the previously growing equity markets—has been facing higher risks (Ali 2011).Strategic Planning Among Middle East Countries to Overcome The Crisis.Speciously, as the research by;(World Bank Regional Economic Update 2011) stated that by the end of2010, countries in the Middle East and North Africa (MENA) had largely recovered from the global financialcrisis, and growth rates were expected to reach pre-crisis levels in 2011. Therefore, how would this bepossible without the proper strategic planning to endure the risk from the overwhelming crisis? According toLarbi (2009), while the impact of the crisis of Middle East financial systems has been limited so far, goingforward, one cannot exclude a significant impact on the real economy. How countries’ real economies areimpacted and how they can mitigate the impact will depend in part on initial conditions. In particular, fiscaland current account balances, as well as debt level, play an important role in shaping countries’ ability tomitigate the impact of the crisis. According to Reinikka (2010); the impact of the 2008–09 global financialand economic crises varied substantially among three country groupings in the Middle East and NorthAfrica (MENA): the Gulf Cooperation Council (GCC), developing oil exporters, and oil importers.Henceforth, this section will identify and state the strategic planning structure that has been practiced bythe Middle East countries in order to combat the crisis. ~ 10 ~
  • 11. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 1. Strategic Planning in the GCC(Gulf Cooperation Council) countries: Oil Exporting Countries;Formation of Gulf Cooperation CouncilThe Gulf Cooperation Council is known as a Cooperation Council for the Arab States of the Gulf and it wasfound in 26 May 1981.The GCC was established in order to promote coordination between member statesin all fields to achieve unity. (Wikipedia) Basically, the original Council comprised the 630-million-acre(2,500,000 km²) Persian Gulf states of the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar andKuwait. The unified economic agreement between the countries of the Gulf Cooperation Council wassigned on 11 November 1981 in Abu Dhabi. These countries are often referred to as The GCC States. Theobjective of this council was to formulate similar regulations in variety of fields like economy, finance, trade,tourism and other. Besides that, they also involve in fostering scientific and technical progress in industry,mining, agriculture, water and others.(Sheikh Mohammad Bin Rashid Al Moktoum).Other countries in theMiddle East, in particular the countries of the Gulf Cooperation Council (GCC), are more closely tied to theglobal economy and their performance is more directly affected by world economic conditions. The GCC countries list of nations or member states is Bahrain, Kuwait, Oman, Qatar, Saudi Arabia,and UAE. The full name is Cooperation Council for the Arab States of the Gulf (CCASG) and also referredto as the Arab Gulf Cooperation Council (AGCC). GCC countries have a significant economic dependenceon oil export as Kuwait, Saudi Arabia, and Abu Dhabi in the UAE in particular. Qatar has a large natural gasindustry; Oman and Bahrain have much less dependence on oil. The GCC oil exporters were hardest hitbecause the crisis affected them directly through two different channels: (a) a negative terms-of-tradeshock associated with the drop in oil prices; and (b) a financial shock, which destabilized overextendeddomestic banks and led to the bursting of a real estate bubble (Reinikka, 2010). Eventually, as the GCCcountries comprises a large influence on the Middle East regional economy, this section will cover brieflyabout the strategic plan which has been practiced by this countries to cope the impact of the crisis. Thegovernments of the GCC states are dealing with the consequences of the crisis in a number of strategicplans: a) Implement expansionary fiscal policy (Winckler, 2010): This policy has three goals: • To maintain the economic activity level ~ 11 ~
  • 12. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 GCC Countries Economic expansion Qatar The 2009-10 budgets, is expected to be the largest ever because Qatar has intended to launch large-scale infrastructure projects such as construction of the New Doha International Airport and the Sidra Hospital, expansion of the Ruwais port, large-scale road-building, expansion of drainage systems, and improvements in educational and vocational facilities. Inclusively, in 2010, more than $229 billion worth of projects were planned or under way in Qatar alone. Oman In year 2009 the budget spiked 10.8% higher than 2008; although there is sharp decline in governments revenues. Saudi Arabia Saudi capital spending for 2009 is also projected to be 36 percent higher than in 2008 and includes $7 billion for a railway linking Damman and Jeddah through Riyadh. Reserves requirement for banks has been lowered from 13 percent to 7 percent, $2-3 billion has been injected into banks in the form of dollar deposits, all bank deposits have been guaranteed, and the government has allocated an additional $2.7 billion in credit to low income citizens having problems accessing loans According to Winckler (2010), each of the GCC countries without exception has adopted extraordinary measures in order to restore confidence and to stabilize the financial sector, among them, cutting interest rates, providing bank deposit guarantees, reducing requirements on bank deposits, and introducing new credit facilities in order to strengthen bank liquidity. The Persian Gulf governments have also injected capital into private banks to encourage them to lend more to the private sector.• To create new job opportunities for the national workforce Apparently, to reduce the unemployment rate in GCC countries radical approach has been taken such as diversifying job opportunity for the national workforce. Therefore, in the case of Saudi ~ 12 ~
  • 13. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 Arabia as example; in April 2009, the Saudi Human Resources Development Fund offered to pay half of the first years salary in advance for Saudis who were newly hired by private firms. Previously, it had paid a 50 percent bonus after the completion of the employees first year on the job. Furthermore, the aim of the advanced payment was to tempt companies to increase the number of employed nationals since getting credit from banks had become more difficult since the onset of the financial crisis. Saudi authorities also strengthened the inspection regime for private companies adherence to the government-mandated quotas for national employees (Arab News 2010).• To prepare for the end of the crisis. The practice of the expansionary fiscal policy has innate good benefits. Despite considerable damage to the GCC economies resulting from the global crisis, the situation in these countries was and still is much more favorable than that of the rest of the worlds economies. It appears that timely responses by the GCC governments to the worldwide financial crisis brought about stability in their economies when most other worldwide economies were still shaken by it (Iradian, 2009). Since the second quarter of 2009, the Persian Gulf economies have gradually returned to solid growth.b) Steadily Increase Oil Production Capacity (Winckler,2010) To begin with, in order to curb the situation in which the decrease in demand for oil at the start of crisis the Middle East countries has implement to reduce the oil production at first and then gradually increase the production later when the crisis muted. GCC countries tried to continue demand for oil as the worlds primary energy source at the expense of tracking alternative energy sources. Increasing oil production spare capacity in order to sustain moderate prices for the long- run was another measure adopted by many GCC members. There were two goals for this increase:• Stable and moderate oil prices constitute a major tool for global economic recovery• Maintain a long-term demand for oil at the expense of alternative energies. In mid-2009, the Saudi Arabian crude production capacity amounted to 12.5 million b/d, more than4 million b/d above its production scale in early 2010 (see Table 1). Since the peak of oil prices in mid- ~ 13 ~
  • 14. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 2008, the Saudi authorities have consistently emphasized both their huge proven oil reserves and spare production capacity in an effort to convince oil consumers not to switch to alternative energy sources. The Kuwaiti government is currently acting to increase its oil production capacity to 4 million b/d until 2020. Maintaining the level of the current global oil demand is viewed as insurance for long- term governmental revenues, also enabling the GCC governments to maintain high expenditure levels. Conclusively, according to Reinikka (2010) the Gulf countries are leading the regional recovery as oil prices have rebounded, and the GCC financial sector is stabilizing. Growth in the GCC countries is projected at 4.4 percent in 2010—a remarkable comeback. The recovery in the GCC countries is expected to have a positive impact on other MENA countries, mainly through increased flows of remittances and FDI. Table 1: Oil Production in GCC States, 2000-10 (thousands of b/d)Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010**Saudi Arabia 8,404 8,031 7,634 8,410 8,897 9,353 9,112 8,651 9,261 8,250 8,240UAE 2,368 2,276 2,082 2,248 2,344 2,378 2,540 2,504 2,681 2,413 2,414Kuwait 2,079 1,998 1,894 2,136 2,289 2,529 2,535 2,465 2,586 2,350 2,350Qatar 737 714 679 676 755 766 821 807 924 927 1,020Oman 970 960 897 819 780 774 738 710 757 813 855Bahrain* 190 190 190 240 209 187 185 180 180 180 180Total 14,748 14,169 13,376 14,529 15,274 15,987 15,931 15,317 16,389 14,933 15,059 * Including Bahrains share of Abu Saafa oilfield. ** Jan.-Mar. average. Source: EIA, International Petroleum Monthly, June 2010, table 1.1; ESCWA data. 2. Strategic Planning in the Other Developing Oil Exporting Countries: Eventually, the developing oil exporting countries in the region are Algeria, Iran, Syria, and Yemen. As identified in Global Economic Prospects (June 2011), these countries form a group of economies troubled ~ 14 ~
  • 15. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20by political protest and/or forms of repression on the part of authorities over a range of intensity (from mostsevere in Yemen and Syria, to concealed popular dissatisfaction in Iran, and to a lesser degree in Algeria).Furthermore, the growth for the aggregate of oil exporters immersed from 2.2 percent in 2009 to 1.4percent in 2010. Gains across the group ranged from 1 percent in Iran to 3.3 percent in Algeria, withYemen an exception, as the coming online of an LNG train boosted growth to 8 percent in the year (GlobalEconomic Prospects, June 2011). Developing oil exporters were hurt less than GCC oil exporters as theyfelt the impact of the crisis only through the oil channel (Figure 1). Hence, due to the limited integration oftheir banking sectors into global financial markets, developing oil exporters felt the impact of the crisismostly through the negative oil price shock (WORLD BANK MENA REGION – A REGIONAL ECONOMICUPDATE, APRIL 2010).The financial sectors of developing oil exporters were not affected by the globalfinancial crisis due to the underlying government guarantees and the fact that the banking sectors in thesecountries have remained isolated from global financial markets. Credit growth was much lower prior to thecrisis in the developing oil exporters than in the GCC countries, and therefore these countries experiencedonly a moderate decline. Figure1: Real GDP Growth Rates ~ 15 ~
  • 16. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 a) Steadily Increase Oil Production Capacity (Winckler,2010)Due to the crisis; for the oil-exporting MENA countries, the slower economic growth is partly due to adecision by OPEC to reduce its oil output by 2.2 million barrels per day (7.5% of the cartels total oil outputin December 2008), effective January 2009. Habibi (2009), state that the implementation of this decisionled to a reduction in the value of Arab oil exporters’ oil sector GDP in real terms. Outwardly, the developingoil exporters has also practice the similar strategic planning towards the crisis whereby steadily increasethe oil production to avoid any losses. Hence, global demand for oil started growing in the fourth quarter of2009 after falling for five consecutive quarters. The strong rebound was due to the rapid recovery inemerging markets, most notably Asia, and improvements in global financial conditions. US demand for oilhas started growing too (WORLD BANK MENA REGION – A REGIONAL ECONOMIC UPDATE, APRIL2010). This growth acceleration is faster than that expected for developing oil exporters, and in glaringcontrast to the slight deceleration anticipated for oil importers in 2010 as illustrated in Figure 2. Figure 2: Expected growth rate changes relative to previous year (percentage point change) 3. Strategic Planning Among Oil Importing CountriesAs opposed in the study of Reinikka (2010); the oil-importing MENA countries were hurt mostly by thesecondary effects of the crisis on trade, remittances, and foreign direct investment (FDI). Growth ofMENA’s oil importing countries decelerated from 6.8 percent in 2008 to 4.8 percent in 2009, mostly ~ 16 ~
  • 17. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20because of the secondary effects of the crisis on trade and remittances, and in some cases because of itsnegative effect on FDI (Figure3). Key non-oil sectors such as services and tourism remained relativelyresilient, while the decline in oil and other commodity prices limited the deterioration of their externalbalances. Stimulus packages in the Arab Republic of Egypt, Jordan, Morocco, and Tunisia also helpedsoften the deceleration in growth (Reinikka 2010). Figure 3: Growth in remittances (% change) a) Diversification of policies (strategic planning) Subsequently, the plan to overcome the crisis in the oil importers region they have used various policies. According to (WORLD BANK MENA REGION – A REGIONAL ECONOMIC UPDATE, APRIL 2010- recovering the crisis); as the crisis unfolded only Jordan, Morocco and Tunisia had to introduce different types of financial support measures. Hence, i.e.: Tunisia and Morocco introduced liquidity support, while Jordan offered deposit guarantees, and monetary easing. Moreover, in other oil importing countries, the policy responses focused on mitigating the impact on the real economy. Egypt and Tunisia passed fiscal stimulus packages geared toward job-creating infrastructure investments. Morocco implemented measures to help firms cope with the decline of external demand including guarantees of working capital loans, easing of regulation, and debt rescheduling facilities. Meanwhile, the recovery of oil importers in MENA will depend momentously on their key markets, especially the European Union (EU) and the GCC countries. Therefore, delicate recovery expected in the Eurozone will drag down growth in the near term, particularly the growth of those with strong links to EU markets. Growth of oil importers is expected to slow down slightly to 4.5 percent in 2010. In addition the trade is recovering, with export revenue of oil importers expected to grow by 7.7 percent in 2010, after contracting by 13 percent in 2009. Remittance flows are expected to grow by 1.3 percent in 2010, albeit this pace is much slower than the one observed during the pre-crisis years (Reinikka, 2010). ~ 17 ~
  • 18. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20 4. Working Together Towards Recovery And Improved Crisis ResilienceAnother; strategic approach of Middle East countries to combat the crisis is to cooperate with higherauthorities and accepting wide range of helping hand from other institution. Well, according the (WORLDBANK MENA REGION – A REGIONAL ECONOMIC UPDATE, APRIL 2010- recovering the crisis); duringthe past year, the World Bank Group responded actively to the economic downturn in the MENA region andtailored this support to the needs of the countries. Consequently, in Iraq, where the fall in oil prices severelyaffected public finances, the World Bank provided financial support through a development policy loan,working closely with the International Monetary Fund. Furthermore, as in the oil importing MENA countries,such as Egypt, Jordan, Morocco and Tunisia, the World Bank has been providing technical support throughdiagnostics work as well as quick-disbursing financial support through several development policyoperations focusing on financial sector, public sector reforms, and trade integration. These operations alsohelp build crisis resilience for the future. In the GCC countries, the short-term response of the World BankGroup was to step up economic and financial monitoring and engage in strategic reimbursable technicalassistance. IFC’s Global Trade Finance Program has helped businesses, especially small ones, accesstrade finance, while its Global Trade Liquidity Program has helped infuse liquidity into the trade financemarket. IFC has also helped banks across the MENA region by sharing views and solutions on how tosuccessfully navigate the crisis, structure robust risk management systems, and train key bank staff on riskmanagement. ~ 18 ~
  • 19. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20DISCUSSION OF THE FINDINGSAs mention earlier in literature review, the Middle East country’s can be divided into three categories .Inincludes GCC countries (oil exporting), developing oil exporting countries, and oil importing countries.Furthermore we will be discussing in detail about the strategies that have been used to overcome theglobal financial crisis and do some justification. Firstly, author (Wincker, 2010) mention about theimplementation of expansionary fiscal policy. In our point of view this strategy was successful and effectivebecause when the Middle East countries plan to spend more, it will increase the revenue of the country. Forexample in the 2009-10 budgets, is expected to be the largest ever because Qatar has intended to launchlarge-scale infrastructure projects such as construction of the New Doha International Airport and the SidraHospital, expansion of the Ruwais port, large-scale road-building, expansion of drainage systems, andimprovements in educational and vocational facilities. This indicates that it could be one of the portionsof gross domestic product of the country. In addition, when the revenue is increased the growth of GDP willincrease. Because, one of the policy aim is to maintain and stable the economic level. The fiscal policiesalso, help the GCC, measures to help ease inter-bank lending rates and add new regulations to their stockmarkets. The other aim of this policy is to create new job opportunities for the national workforce. Based onthe Arabic News (2010), in April 2009, the Saudi Human Resources Development Fund offered to pay halfof the first years salary in advance for Saudis who were newly hired by private firms. Previously, it had paida 50 percent bonus after the completion of the employees first year on the job. Furthermore, the aim of theadvanced payment was to tempt companies to increase the number of employed nationals since gettingcredit from banks had become more difficult since the onset of the financial crisis. From here what theywant to critic is to reduce the unemployment rate in GCC countries they must be offer job to their countrypeople. When, there is too much foreign or other country workers in GCC countries, it will lead to so muchof cash outflow for the country that will give negative impact. It also increases the unemployment rate in thecountry. After years of decline in unemployment among Gulf nationals due to the strategy of labour market“nationalization” through citizen quotas in private sector employment, the lay-off threat reversed the trend.Private sector employees, considered at a disadvantage relative to their peers in secured public sectorpositions, held their governments responsible for securing their jobs. This situation forced governments todiversify their policy response and introduce labour market policies. However, diverse trends converged to ~ 19 ~
  • 20. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20contain rising labour governance issues. Saudi officials issued protectionist “anti-foreign” statements,denouncing the employment of foreigners at the expense of “unemployed national[s]” but with no practicalstrings attached. Kuwait has drafted a progressive new labour law that practically equates in terms ofbenefits citizens and foreigners but maintains the “sponsorship scheme.” Meanwhile, the author (Wincker,2010) mention that, in order to curb the situation in which thedecrease in demand for oil at the start of crisis the Middle East countries has implement to reduce the oilproduction at first and then gradually increase the production later when the crisis muted. This strategy isused in GCC countries. In our point of view, this strategy will be useful to steadily increase oil productioncapacity to ensure the financial resources needed to maintain the entire system. This also helps to continuedemand for oil as the worlds primary energy source at the expense of pursuing alternative energy sources.In other way, oil production was a main source of income for the GCC countries to survive. Based on the Global Economic Prospects (June 2011), the developing oil exporting countries in theregion are Algeria, Iran, Syria, and Yemen these countries form a group of economies troubled by politicalprotest and/or forms of repression on the part of authorities over a range of intensity (from most severe inYemen and Syria, to concealed popular dissatisfaction in Iran, and to a lesser degree in Algeria).To avoidthis crisis, author suggest that, for steadily increase oil production capacity (Winckler,2010). Due to thecrisis; for the oil-exporting MENA countries, the slower economic growth is partly due to a decision byOPEC to reduce its oil output by 2.2 million barrels per day (7.5% of the cartels total oil output in December2008), effective January 2009.However, economic growth has been constrained by anaemic credit growth,which has started inching higher only recently, and by the fact that the four GCC members of OPEC haverestrained output of crude oil to support oil prices, in the face of large stock overhang and rising non-OPECsupply. Moreover, author Reinikka (2010) identified that the oil-importing countries were hurt mostly by thesecondary effects of the crisis on trade, remittances, and foreign direct investment. To cure this crisis, theauthor suggested to apply diversification policies and working together recovery and improved crisisresilience. The policy has been used are focused on mitigating the impact on the real economy. Thisstrategy will be effective because by applying it, the other oil importers will know how to reduce the crisis bygetting guidance of the big authorities. In addition to easing liquidity constraints on banks and firms, so farthe response has focused on mitigating the short-term impact of the crisis on the real economy, althoughsome measures including tax cuts and investment expenditure would promote sustained growth. In Tunisia ~ 20 ~
  • 21. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20and Morocco, fiscal stimulus through increased current expenditures included measures to support privateconsumption, in the form of public sector wage increases, and measures to help SMEs cope with thedecline of external demand, including guarantees of working capital loans, easing of regulation, and debtrescheduling facilities. Assistance to firms, irrespective of size, was provided in Egypt through transferssupporting exporters, industrial zones in the Delta region, and logistic areas for internal trade. Stimulusthrough capital expenditure increases went into job-creating infrastructure investments in Egypt andTunisia. In addition, Egypt increased investments in rural and social sectors. A range of tax measures were introduced in Egypt, including cuts in customs duties on selectedindustrial inputs and capital goods, temporary suspension of the sales tax on selected capital goods,introduction of import tariffs on steel, and imposition of anti-dumping duties on sugar to protect domesticproduction. Djibouti and Lebanon registered only minor declines in growth during the same period, withboth economies growing at 5 and 8 percent, respectively, in 2009. Lebanon grew at a much faster pacethan other oil importers with GCC links, reflecting a post-conflict recovery boom aided by strength in certainsectors – tourism and real estate – and vibrant private investment. Policy interventions in Lebanon helpedfuel the post-conflict recovery boom, but strained further the fiscal outlook. Public sector wages increased,and a daily compensation fee was introduced for low-income public school students. Other policies wereintroduced to ensure access to finance, including subsidized interest rates extended to all sectors, exceptconstruction and trade, and strengthen macroeconomic fundamentals such as an increase in internationalreserves. ~ 21 ~
  • 22. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20LIMITATION OF THE STUDYAlthough the study has reached its aims, there were some unavoidable limitations. First because of thetime limit, we can’t find some important information for our third strategic planning, which are oil importerscountries affected by foreign direct investment trade and remittances. An additional there was lack ofsources for that part. Second, the students’ overloaded work, to some extent, might affect the correlationbetween students’ motivation in learning current issue subject because they were required to take part inmany studies at the same time. Finally, the slow network might discourage participants’ interests andmotivation in joining peer feedback activities. ~ 22 ~
  • 23. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20CONCLUSIONThe global economic crisis which began in the second half of 2008 impacted Middle East economiesthrough several transmission channels. The flow of foreign investment into the region diminished; the crudeoil market experienced a significant price correction after having reached record-high levels as of mid-2008;international tourism to Middle Eastern destinations declined; and there was a reduction in global demandfor the region’s non-oil exports. Depending on their exposure to each of these transmission channels,different Middle East countries were impacted differently by the crisis. Most governments are taking actionto address the vulnerabilities identified in their economies. For example, GCC countries intervened early tosupport their banking systems and stock markets. They did so by easing monetary policy, securing thebanking system’s liabilities (including through deposit guarantees), and by injecting fresh capital wherenecessary. Saudi Arabia, for example, has announced a substantial investment spending plan andprovided capital to Saudi Credit Bank to secure credits to low income households. Among G-20 countries,Saudi Arabia’s fiscal stimulus package is the largest as a share of GDP. Kuwait is discussing astabilization package. Egypt has announced a fiscal stimulus package geared toward job-creatinginfrastructure investment. Besides that, the World Bank doing help to the global financial crisis impacted countries. The WorldBank Group is responding on a number of fronts. The World Bank group will remain close to their clients togain a good understanding of the crisis implications for each country. The World Bank’s knowledgeresources are being mobilized to support their client countries in efforts to monitor economic and socialdevelopment, review scenarios and policy options, design policy responses, and implement reforms inthese critical times. Middle East countries will continue to play a major role in knowledge creation andsharing by raising the effectiveness of our analytic, advisory, and capacity enhancing services andstrengthening our adaptation and learning. Apparently, if this global financial crisis occurs in future, we have to know what kind of theprecaution steps should be taken to avoid this crisis. Because this crisis was give a good lesson andoverview the impact that we will be face. Rather than that, government and other authorities have to play acrucial task to make the Middle East countries economy being stable. ~ 23 ~
  • 24. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20REFERENCESAli, S. 2011. “Islamic Banking in the MENA Region.”Background paper for this book, World Bank, Washington, DC.Bank, T. W. (2010). Sustaining the Recovery in Times of Uncertainty.Creane, S., Goyal, R., Mobarak, A., & Sab, R. (2010). Measuring Financial Development in the Middle East and North Africa: A New Database. International Monetary Fund Journals.Habibi, N. (2009). The Impact of the Global Economic Crisis on Arab Countries:A Year-End Assessment. Middle East Brief.Khamis, M., & Senhadji, A. (2010). Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead.Khamis, M., & Senhadji, A 2010b. Impact of the Global Financial Crisis on the Gulf Cooperation: Crisis and Challenges Ahead: An Update. Washington, DC: International Monetary FundLarbi, H. (2009). The Financial Crisis: Impact on the Middle East. The World Bank Middle East Department.Leenders, R. (2007). Regional Conflict Formations: Is the Middle East Next? Third World Quarterly.Lin, J. Y. (2008). The Impact of the Financial Crisis in Devoloping Countries. The Institute of Chartered Accountants of Sri Lanka.Maroun, N., & Azour, J. (n.d.). One Year After The GCC Regions Post Crisis Prosspects.Motaghi, L., Carey, K., & Gourdon, J. (January, 2011). Sustaining The Recovery and Looking Beyond.Middle East and North Africa. (June 2011). Global Economic Prospects June 2011: RegionalAnnex.(October 2010). chapter 2: Country and Regional Perspectives. International Monetary Fund:World economic outlook: Recovery, Risk, and Rebalancing.Ramadhan, M., & Naseeb, A. (2008). The Global Financial Crisis: Causes and Solution. ~ 24 ~
  • 25. CURRENT ISSUES IN INTERNATIONAL AND OFFSHORE BANKING HE20Reinikka, R. (2010). A Handbook on the Future of Economic Policy in the Developing World. In O. C. GIUGALE, The Day After Tommorow.Rocha, R. R., Arvai, Z., & Farazi, S. (2011). A Road Map for the Middle East and North Africa. FinancialAccess and Stability.Winckler, O. (2010). Can the GCC Weather the Economic Meltdown? MIDDLE EAST QUARTERLY SUMMER 2010. ~ 25 ~

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