Economic Instability in the Gulf Region: Insights from a Dual Shock

Abstract

The emergence of the COVID-19 pandemic has caused financial markets to suffer historic losses during the first quarter of 2020, at levels unseen since the crisis of the futures markets in 1987. The pandemic affected global markets parallel to a simultaneous shock from the oil price war between Saudi Arabia and Russia. As the global health crisis worsened, governments worldwide were forced to take measures that led to economic lockdowns and significant economic disruptions. This research paper examines the extent to which the dual shock impacted the GCC economies due to the critical implications for the Gulf region because of its heavy reliance on oil. The core findings show that the dual shock caused significant disruption in the GCC stock exchanges, except for the case of Bahrain's stock market, which emerged as relatively stable.

Financial Uncertainty from a Dual Shock at Global Level–Insights from Kuwait

“…The results show interesting insights, as they clearly illustrate that the economic models of Saudi Arabia and Kuwait share significant reliance on the oil market. Moreover, in line with early research studies examining Kuwait's stock exchange (Al-Shami and Ibrahim 2013;Al Hayky and Naim 2016;Merza and Almusawi 2016;Kisswani and Elian 2017;Alshihab andAl Shammary 2020, Alotaibi andMorales 2022) the outcomes of this research study support the evidence that the Kuwait stock market has a positive relation with oil volatility. This result is not surprising due to the country's heavy reliance on oil.…”

“…This result is not surprising due to the country's heavy reliance on oil. Furthermore, and in line with Alotaibi and Morales (2022) research findings, the GARCH (1,1) model offered the best estimates as it captured the volatility persistence of the G7 markets. Consequently, the GARCH (1,1) efficiently captured the volatility persistence for G7, E7, GCC, and oil benchmarks (WTI, Brent, OPEC, Dubai).…”

“…Figure 1 below illustrates how oil prices continued their sharp decline through April 2020, and by the 19th, the West Texas Intermediate Index (WTI) reached 17$. Moreover, the 20th and 21st of April were historical days as WTI recorded on the 20th negative prices of −36$ and the next day 21st −6$ for the first time in oil history (Alotaibi and Morales 2022;Ruiz Estrada 2020). Int.…”

“…The research findings inferred that good news has a more significant impact than bad news on the volatility of index returns. Furthermore, Alotaibi and Morales (2022); Yousef (2020) examined the impact of the dual shock (global health crisis and oil price shock) in the GCC economies finding evidence of significant disruption across the region, except for the case of Bahrain's stock market that emerged as being relatively stable.…”