The current war is damaging economies across the Gulf region. It has stopped exports of up to 15 per cent of global oil and petroleum products, 20 per cent of liquefied natural gas exports and a third of seaborne fertilisers. It has brought regional tourism and aviation sectors to a halt. For now, these effects are temporary. But what is the economic outlook for the region after the war?
The most likely result seems to be a weakened but defiant Iran. This would be a worst-case scenario for the Gulf monarchies, creating an enduring risk that Israel and the US will conduct future air strikes and that Iran — bereft of much of its longer-range arsenal — will once again retaliate against soft targets in the Gulf.
But the outlook for leading Gulf Cooperation Council (GCC) economies differs. Over the past two decades, the UAE has sought to make itself indispensable to global powers and has invested heavily in its military modernisation. Yet it will remain the most vulnerable. It is geographically close to Iran and most of its logistics infrastructure sits inside the Strait of Hormuz — and it is an enticing political target for Tehran as a member of the Abraham Accords. Its reliance on tourism, shipping and aviation, foreign direct investment and white-collar expatriates makes its economy the most vulnerable to Iranian attacks which, in turn, puts pressure on the western powers.
UAE President Mohamed bin Zayed is known to be intensely security-focused. State investments in logistics, finance and AI are meant to help insulate it from regional threats by giving foreign powers an interest in protecting the country. Yet they appear to have made the country more vulnerable in the midst of a prolonged conflict, as they provide more pressure points.
Saudi Arabia, while far from immune to regional threats, has a larger land mass and an additional strategic coastline at the Red Sea, far from Iran. It has kept its distance from Israel, refusing to normalise ties as the UAE has. Its economy relies more on state spending and domestic demand than foreign capital and footloose expats. Its oil installations remain vulnerable, and critical for the global economy, but the range of vital assets along the Gulf coast that need protection is smaller.
The large-scale FDI inflows targeted by the kingdom’s Vision 2030 remain unlikely — but they were never going to be the key driver of Saudi Arabia’s economy given its much larger size. Instead, the kingdom’s diversification process relies more on modernising its domestic economy, especially in consumer sectors and unglamorous heavy manufacturing. This economic model is more resilient to geopolitical shocks. While it certainly faces fiscal challenges, being relatively less open makes Saudi Arabia less vulnerable.
The kingdom could now benefit from its safer location in strategic areas like minerals processing, data centre services, logistics and aviation; in the latter two fields, the UAE’s lead was until recently unassailable. While Saudi Arabia might not become a global hub, GCC countries could diversify their regional logistics networks away from Dubai’s Jebel Ali, relying more on the kingdom’s Red Sea coastline and cross-Arabian transport infrastructure, including pipelines.
If Yemen’s Houthis enter the war and once again harass ships in the Red Sea, Saudi Arabia’s geographic advantage would diminish. Yet Jeddah’s large port and the oil port in Yanbu lie about 800km and 1,000km north of the Yemeni border respectively. Both are accessible via the Suez Canal, avoiding the Bab el-Mandeb Strait that is most directly threatened by the Houthis.
Bahrain, Kuwait, Qatar and Oman have less diversified, less globalised, more state-dependent economies, which are less sensitive to international flows of capital and people. Yet they are small and close to Iran, although Oman has a larger hinterland beyond the Strait of Hormuz providing relative protection for its shipping routes. Kuwait and Qatar have large fiscal reserves while Bahrain and Oman are budget-constrained. But all of them are likely to remain exposed to the threat from Iran, which could deter future investment.
Many regional elites feel that the UAE has disregarded the Arab world in recent years, instead nurturing its global status and its partnership with the US and Israel. Now, thanks to those ties, it has been pulled back into the region with a big thud. It retains vast sovereign wealth, which will prevent any acute economic crisis. And Dubai will not disappear as a global hub. But unless there is regime change in Iran, the UAE will operate under more of a cloud than its less globalised Saudi neighbour.
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