Cross-Countries Empirical Analysis Of GCC Financial Systems Instability

Abstract

In literature, the drivers of each of the Gulf Co-operation Council (GCC) country financial system instability did not receive adequate attention to be investigated separately, since the GCC countries are perceived as one Oil & Gas economy with the same financial risk drivers. This paper fills this gap by examining the relative importance of the financial risk drivers for each GCC country capitalizing on time series analysis and utilizing monthly rating of each GCC country’s financial risk driver for the period of Jan. 2000 to Dec. 2013.

This paper argues that the drivers of each GCC’s country financial system instability are different and have unalike explanatory power from one GCC country to another. Meanly, it examines the impact of Foreign Debt Service as a percentage of Exports of Goods and Services (FDS/EGS), Foreign Debt as a percentage of GDP (FD/GDP), Net International Liquidity as months of Import Cover (NIL/IC), Current Account as a percentage of Exports of Goods and Services (CA/EGS), and Exchange Rate Stability (EXRS) on each GCC country financial system instability.

In terms of financial risk rating, results show that NIL/IC has negative impacts on all GCC countries financial risk rating. For financial system instability, results indicate that it is driven by CA/EGS in Qatar, KSA, Oman and UAE, by FD/GDP in Kuwait and Bahrain. In terms of the explanatory power of the GCC financial risk, results revealed that FD/GDP has the highest explanatory power in the case f Kuwait, KSA and UAE, CA/EGS in the case of Qatar and Oman, while the FDS/EGS has the highest explanatory power in the case of Bahrain.