Gulf’s growth model faces its first true stress test

The US-Israel war with Iran has now stretched beyond five weeks, inflicting extensive damage on energy infrastructure, airports, ports and commercial and technology hubs across the six GCC states.

The closure of the Strait of Hormuz to Gulf oil and gas exports is, in itself, an economic catastrophe. It forces the GCC to conclude that energy export security is not national security.

Drone and missile attacks triggered a sharp decline in visitor arrivals and an exodus of high-net-worth investors from financial centres such as Dubai and Abu Dhabi. Yet the UAE’s robust air defences and crisis management protocols have helped to restore confidence in public safety.

It is too early to calculate the full fiscal impact. But the components are clear: higher military spending, reconstruction costs and severe oil and gas revenue losses from a closed Hormuz.

Wall Street investment banks are now quantifying the impact of the war on GCC economies. Goldman Sachs estimates that if the conflict continues to the end of April, GDP in Qatar and Kuwait could decline by as much as 14 percent, as Doha and Kuwait City export all their oil and gas through the Strait of Hormuz.

Saudi Arabia and the UAE, the GCC’s two largest economies, could see GDP fall by 3 percent and 5 percent respectively, as they retain some export capacity through pipeline-linked tanker terminals at Yanbu and Fujairah.

The resulting economic losses are likely to exceed those seen during the Covid-19 pandemic, as energy exports and non-oil activity come under pressure across the six GCC states.

It is significant that no major credit ratings agency has downgraded GCC sovereign debt since the war began on February 28 (Bahrain’s debt was downgraded by Fitch a week before the war began due to public finance concerns, not geopolitics).

The GCC faces a secondary economic shock as borrowing costs rise sharply in the post-war environment. A roughly 0.5-percentage-point increase in the US 10-year Treasury yield – against which GCC debt is priced – combined with an expanding war risk premium on regional assets will push funding costs significantly higher.

Crucially, a ceasefire involving only the US would not eliminate Iran-related geopolitical risk, suggesting this premium is likely to persist.

The impact will be broad-based, raising the cost of capital across sovereign issuance, bank funding, corporate borrowing and project finance, and tightening financial conditions across the region.

The UN estimates that direct war damage to the GCC thus far exceeds $200 billion. However, this is a fraction of the losses sustained due to lost petrocurrency revenues and shifts in sentiment regarding the GCC’s tourism and business ecosystem.

The GCC’s dollar pegs constrain monetary easing by regional central banks. With the US dollar strengthening since the war began and inflation risks limiting the scope for aggressive Federal Reserve easing in 2026, policy flexibility remains tightly restricted.

Because GCC currencies cannot devalue, the burden of macroeconomic adjustment falls disproportionately on asset markets. This is already evident in equity performance, with Emaar Properties shares down more than 35 percent from their pre-war peak.

While Emirates airline is not publicly listed, the sharp rise in jet fuel costs and the hit to tourism will weigh heavily on Dubai’s aviation sector, which accounts for roughly 27 percent of the emirate’s GDP.

The war will reshape Dubai’s property market. Off-plan launches represented two-thirds of a record $187 billion in transaction volumes in 2025. However, transaction volumes could sink as low as $40 billion in 2026 without the off-plan ballast.

UAE property developers can no longer rely on presales financing from investors at the very moment they have raised $6 billion in global capital markets – a combination that creates a clear blueprint for a debt squeeze.

While GCC banks are well capitalised and liquid, they will face higher borrowing costs in the global interbank market and losses on their property loans as their exposure to the sector is still excessive at 15-25 percent.

Bahrain could face more sovereign debt downgrades since its energy infrastructure has been extensively attacked by Iran and it is not exporting any diesel, naphtha, jet fuel or aluminium via Hormuz. Iran war risk is also a geopolitical sword of Damocles on the growth of the GCC’s financial hubs.

Paradoxically, even the steep rise in Brent crude and liquefied natural gas is actually negative for the GCC as it increases the risk of a global recession. It also accelerates the diversification strategies of its Asian clients away from the Middle East.

A higher-for-longer risk premium on GCC assets is also now inevitable.