The Gulf Cooperation Council states will shift their economic strategies to domestic and core regional interests as a result of the Iran war, with a renewed focus on domestic infrastructure, safety nets and strategies for comparative advantage to help them recover some of the attractiveness lost during the war. This is likely to impact international investments, long-term domestic projects and reshape their economic links. GCC member states face varying degrees of economic impacts from the closure of the Strait of Hormuz and accompanying Iran war that began Feb. 28. According to Goldman Sachs forecasts, a two-month closure could cause loss of up to 14% of GDP for Qatar and Kuwait and 3-5% of GDP for Saudi Arabia and the United Arab Emirates in 2026. However, such estimates are preliminary and do not fully account for potential future damage to regional infrastructure, the possibility of food and fuel shocks pushing up the costs of imports, the loss of tourism and potential investment and business flight from an extended conflict. As a result, the full economic impact of the conflict remains unclear while it is still ongoing, but already, the Financial Times has reported that the Gulf Arab states are reviewing investments in the face of the economic impact of the war.
GCC states will prioritize core domestic political stability as well as the economic stability of key partners like Jordan, Morocco and Egypt. GCC governments will shift their budgets and investment strategies to boost social safety nets for citizens, support weaker economies within the GCC and ensure resources are available for further economic support to regional strategic allies. Domestically, GCC states will focus on direct subsidies for citizens and high-value residents, such as tax holidays, citizens' accounts designed to boost domestic consumption and improve living standards, food and fuel subsidies and potential hiring sprees in government sectors in countries like Saudi Arabia, the United Arab Emirates and Qatar. These efforts will mainly prioritize citizens but will also include policies to retain business professionals, investors and scientists. Meanwhile, the wealthier GCC states will see it as essential to prevent the weaker economies of Bahrain and Oman from contracting in a way that might destabilize their political systems. This will be especially the case for Bahrain, which has a high debt-to-GDP ratio and limited fiscal space for extra spending to maintain its standard of living. Wealthier countries like Saudi Arabia and the United Arab Emirates are likely to provide ongoing economic aid to Manama to help stabilize its political system. Oman will also receive financial support, though Muscat's desire to avoid reliance on its neighbors like the United Arab Emirates and Saudi Arabia may result in more modest measures. Finally, Gulf Arab states will prioritize their strategic regional partners to ensure they can withstand extended food, fuel and economic shocks. The main focus will be on fellow Arab monarchies like Jordan and Morocco, which received significant aid following the Arab Spring and the Russian invasion of Ukraine. Egypt will also be a priority given its recent economic stabilization and concerns that another living standards crisis could trigger political instability and a return to conditions that led to the Arab Spring in 2011. With sovereign wealth funds totaling around $4 trillion from Saudi Arabia, Qatar and the United Arab Emirates, these wealthy Gulf countries are likely to be able to meet the economic demands of a short-term regional downturn.
As GCC states focus on stabilizing their economic positions and attractiveness, they are likely to move away from policies designed to expand the tax base, encourage nationals to move into the private sector and even move away from some of their direct economic competition. Already, the United Arab Emirates is considering a tax holiday for residents who have fled the country, changing the time requirements to earn a tax exemption (a move largely designed to impact companies, given the United Arab Emirates has no income tax). But this is likely only the start of exemptions, subsidies and spending changes designed to lower the cost of living and doing business in the region to offset the impact of the war. Other tax holidays and exemptions are likely, including tax holidays for corporate tax rates, exemptions for VAT and new subsidies for food, fuel and utilities. Meanwhile, other policies like nationalization quotas for the private sector might be relaxed to allow companies hiring flexibility. Some regional governments may expand public job rolls to provide reliable employment to citizens while the regional economy remains uncertain. Even so, these policies are likely to remain temporary and be reversed once the economy recovers after the war. Meanwhile, to help support the recovery, GCC states and their sovereign wealth funds are likely to reassess their investments abroad, particularly in foreign government bonds, non-strategic real estate, digital assets and calculated sell-offs from foreign stock markets. Such sell-offs would be limited by their governments' desire to retain influence in these markets, making it unlikely that they would be market-movers, though they would influence the direction of market shifts. The GCC is unlikely to target any individual country for heavy sell-offs, preferring to broaden moves out across developed economies and partners in Asia in order to minimize the impact on those markets and avoid alienating potential key strategic and business partners. Meanwhile, the need for economic bounce-back will also likely put a final nail in the coffin for long-shot megaprojects like Neom, which were not viable and already undergoing strategic reviews.
In the longer run, Gulf Arab budgets will adjust to increase defense spending, invest in more resilient regional infrastructure and potentially resume competition with one another as the geographic impact of the Iran war adversely affects the attractiveness of the eastern GCC. Gulf Arab states will invest heavily in new air defenses, radar, munitions production and potentially offensive systems. Wealthy GCC states may contribute to purchasing systems for Oman and Bahrain, perhaps at a premium as global shortages restrict the availability of air-defense systems like the THAAD and Patriot munitions. Meanwhile, they will also invest heavily in alternatives to Hormuz, such as railways to the Red Sea, larger trucking fleets, pipelines across Saudi Arabia and/or around Hormuz. They will expand spending on more resilient energy, desalination and port infrastructure hardened against drone and missile attack — projects that will be slow and often expensive to carry out at scale, straining budgets. States including the United Arab Emirates, which has come under heavy Iranian attack during the war, might also invest heavily in bomb shelters and/or air attack alert systems to improve the perception of safety, particularly if they assume another conflict is in the offing in the near future. Gulf Arab states will also seek to harden their technological infrastructure, including data centers. They may subsidize this work to maintain their attractiveness despite repeated Iranian attacks on data centers.
Investments will include potential elements of competition as the individual GCC states try to gain comparative advantages against one another. Saudi Arabia will likely try to take some of the United Arab Emirates' market share in real estate and tourism by investing in new tourist infrastructure and capitalizing on western Saudi Arabia's relative distance from Iran, capitalizing on the United Arab Emirates remaining exposed to future Iranian attacks. At the same time, Qatar and the United Arab Emirates will be reluctant to build infrastructure like rail and pipelines reliant on Saudi Arabia's goodwill out of concern that future intra-GCC diplomatic flare-ups might cause Riyadh to use such connections as leverage. Both may look to Oman for other infrastructure choices in addition to Saudi options, concerned that friction with Saudi might weaken their access to the Red Sea. Finally, the United Arab Emirates and Qatar — seeking to protect their shares of tourism, investment and trade — will likely adopt policies that compete with Saudi Arabia on cost and lifestyle. This may include further social liberalization and using their substantial energy revenues and smaller populations to subsidize key sectors where they risk losing market share to Saudi Arabia.
While eastern Gulf country port capacities at Jebel Ali in Dubai and Port Hamad in Qatar remain the largest in the region, Saudi Arabia's King Abdullah Port is more advanced and designed for modern shipping, with a developing King Abdullah Economic City trying to match the synergy of Jebel Ali's free zone. King Abdullah Port aims for an eventual capacity of 20 million 20-foot equivalent units, equivalent to Jebel Ali's, though the port still requires larger rail and highway links to help connect it to the rest of the GCC's markets.
