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The world economy today is facing a huge financial crisis that it has witnessed never before. It is the strongest turmoil that will have long term effects on both the developing and the developed nations. This global disturbance of the financial system is of staggering proportion. This crisis came to existence in the world’s strongest economy, which is the U.S economy. Many economists believe the root cause behind this to be the uncontrolled distribution of mortgage loans to large number of consumers belonging to all segments of life (Global economic crisis, n.d).
These mortgages were eventually transformed into security investments, which were further distributed to various financial institutions worldwide by the Wall Street. Therefore this step brought huge losses to the Wall Street and all the world markets including the United Arab Emirates felt the impact. Today all the markets face liquidity problems and investors have lost their trust in the financial institutions.
United Arab Emirates is one of the world largest emerging economies. They have shown significant growth in the past decade or more. Although it cannot be compared to the pace, at which China and India are growing. But this market has great potential and has attracted foreign investors from worldwide to its land. Despite the regional instability that has occurred due to the wars, UAE has been able to achieve a sustainable pace of development. But the recent financial crisis has raised concerns in the UAE markets. And the financial analysts are working hard in order to derive a formula that can provide a cushion to the UAE states from the present financial crisis (Property in U.A.E, n.d).
The greatest impact of such a crisis with regard to UAE is that it has brought the economy to a path of uncertainty. The stock market did not show any stability and was on a downturn. In fact many term it as a freefall. For example the Dubai stock market fell by a 68.51% with the index closing around 1980 points approximately in November. Encountering a loss totaling to a 1.3 billion dollars. Consequently the Abu Dhabi market fell down by 46.48% approximately in June, encountering a loss around 1.52 billion dirham. As a whole the stock markets of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates suffered huge losses that can be estimated nearing to 200 billion dollars approximately (IMF organization, 2008).
This is the impact in only one sector. But the biggest impact was felt by the oil sector. The oil sector makes up a 35.9% of the total GDP (2007). This is a considerable figure and can have a strong influence on the economy. The U.A.E states have one of the world’s largest oil reserves. They basically generate a considerable amount of their foreign exchange through the export of oil. Earlier in this year we saw a sudden hike in the oil prices, with prices reaching up to a $147 US dollar per barrel. But these prices were not stable. Because of the various speculations in the market, oil prices started declining in by the end of the year. And dropped up to a record of $60 that is approximately equal to the drop of 60% as compare to the previous prices. Due to high oil price the estimated production revenue was high, but with the decline this could not be attained. Which was not a good sign for U.A.E (U.A.E financial crisis, 2008).
The second sector that felt the impact of this emergency was the banking sector in U.A.E. initially after the Lehman brothers declared their bankruptcy, there was awakening in the world market. Everyone gathered to address this problem. The U.A.E government called for a meeting of the central bank. This was done to analyze the effect of such an act on the banking sector. But the central bank assured that there was no exposure for the U.A.E banks to any such kinds of systematic risks. But since all the markets faced the problems of liquidity, the banks here also come across the same difficulties. This was primarily because the investors had lost their trust in the financial institutions and withdrew their amount.
In order to strengthen the banking sector and to secure it from the aftermaths of the financial crisis, the government took several steps in the direction of stability. The first step to inject liquidity came after the government decided to provide an emergency funding worth 50 billion dirham. Further it also reduced the lending rate in order to boost liquidity. Also inter-bank lending was allowed. And a further lending amount of 70 billion was to be given to the banks.
Despite all these measure the actions didn’t prove to be as fruitful as was expected. As the banks, still faced troubles coping up with the situation and tightened credit. Many of the prominent banks stooped providing loans for example to those who wanted money to buy an apartment.
U.A.E is the hub of development. It has seen a property boom of the largest magnitude. It became a major contributor of the GDP reaching around 16%. The property of U.A.E was considered to be very valuable and attracted a great deal of customers and investors. This was primarily due to the reason of the various mega projects that started and reached completion. Today U.A.E has many luxurious and technologically modern state of the art infrastructures. In this Dubai holds a special place, which is the economic and commercial capital of U.A.E. for example the success of mega project like burj dubai proved to be extremely encouraging for the investors.
The property prices have seen a sudden decline in the past year. Suddenly the climate became unfavorable for the businessmen because of liquidity shortages. Many fear that their projects would suffer heavy losses and are now making plans to cut their costs. No new projects are now being announced.
Like all other countries U.A.E has also come under the pressure of this catastrophe. Although the government believes it can withstand this pressure. Because 95% of the total comprises of SME’s, which are expected to have a relatively milder effect. But this financial crisis will bring with itself greater challenges that are to be dealt with great preventive measures. Such an emergency will help with the emergence of new market structures. These structures will be innovative and will provide solutions to the problems. IMF considers the monetary policy to be the first line of defense (Financial crisis, 2008).
But all the measures and efforts by the United States and its Federal Reserve Bank to bring liquidity and stability, to their own and the world market have proven to be unsuccessful. A growing number of economists predict that if this crisis is not taken care of properly, can take the shape of a big disaster. A catastrophe that is much bigger than the Second World War. The world recessions will be bigger than the period of the great depression.
The U.A.E government is taking all measure to prevent and protect its economy. Recently Prime Minister Gordon Brown visited the Gulf States in order to discuss the financial crisis. So that cooperation is increased to counter the growing crisis and to devise strategies and solutions to empower and support the financial institutions.
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