Oil and macro-financial linkages: Evidence from the GCC countries

We assess potential roles of recent oil price swings in macro – financial linkages for the case of the Gulf Cooperation Council (GCC) countries using bank-level panel data from 2000 – 2016. Employing both dynamic panel and panel VAR modelling, we document evidence indicating significant implications of oil price changes on the GCC financial and real sectors and significant macro – financial linkages. The results are robust in suggesting favourable effects of positive oil price changes on bank profitability, credit growth and output growth. Likewise, we document robust evidence indicating immediate contraction in credit growth, deterioration in credit quality and decline in economic growth following negative oil price changes. We also note that the implications of oil price changes tend to be felt more strongly by small banks. Finally, we find substantial causal interactions between output growth and bank variables, notable of which are robust findings of significant responses of (i) credit growth and bank profitability to business cycle and (ii) business cycle to credit quality. With the documented roles of oil prices on macro-financial linkages, the oil market developments should be monitored closely and, in anticipation of oil price drops, attention should be given to maintaining lending activity as well as safeguarding banks’ financial soundness such that the contraction of real activity can be contained.