The reopening of the Strait of Hormuz will be key. Apart from Oman, only Saudi Arabia and the United Arab Emirates have the capacity to bypass the Strait of Hormuz, but only for limited quantities. For these three countries, the rise in global oil prices should partially offset the decline in export volumes. But the production cuts after a month-long closure are steep For Bahrain, Kuwait, and Qatar, where the totality of exports pass through Hormuz, the impact is even more devastating.
Given the significant weight of hydrocarbons to the Gulf economies, a contraction in regional GDP is likely this year.
And the pain doesn’t stop there. The conflict is also affecting other key sectors too. Airports in Bahrain, Kuwait, and Qatar are nearly shut down, while those in the UAE are operating at less than 40% capacity. Beyond tourism, transport, and logistics, real estate is also at risk given the region’s high dependence on foreign workers.
Thankfully, the Gulf’s macro fundamentals are solid enough to absorb the shock. Sovereign wealth funds here manage over $5 trillion in assets, which is more than twice the region’s GDP. Government debt averages just 30% of GDP, and forex reserves are high. That’s why markets have stayed relatively calm so far. The one exception is Bahrain, whose fundamentals were already weak, and to lower extent Dubai. For the rest, the rise in risk premiums on foreign-currency debt since late February has been less than 20 basis points.
There are other supportive factors. Overall, the Gulf economies were emerging from a period of sustained growth prior to the outbreak of the conflict, driven by solid domestic demand. Unemployment rates are low, inflationary pressures are contained, and banks in the region have taken advantage of this phase of economic expansion to strengthen their balance sheets, both in terms of capitalisation and asset quality.
The Gulf economies’ capacity to withstand a shock is therefore very strong. Nevertheless, the outlook is highly uncertain. It will depend largely on the evolution of the conflict and what the post-war regional landscape looks like. Because while the Gulf has many strengths, persistent geopolitical risks could erode their attractiveness to foreign investors, and those investors are key for the region’s economic future.
One final question arises. How will this crisis affect the Gulf states’ ability to keep investing heavily abroad? That’s hard to predict. In the very short term, we can expect a shift in priorities towards supporting their own economies, and therefore a slowdown in foreign investment. Nevertheless, a massive sell-off of assets held abroad seems unlikely, given that sovereign wealth funds are pillars of the Gulf countries’ economic diversification strategies.
