Gulf Economies Shrink 5% as Hormuz Crisis Stalls Diversification

Summary

• IMF expects Gulf Cooperation Council economies to contract 5 percent this year, with Kuwait, Bahrain and Qatar facing double-digit declines.
• The war in Iran entered its ninth month, with strikes hitting Aramco's headquarters, a pipeline and shipping inside the Strait of Hormuz.
• Tourism, aviation and AI projects built to reduce oil dependence are now absorbing the damage, Moody's said.

The latest

Gulf economies are on course to contract 5 percent this year as attacks around the Strait of Hormuz choke energy exports, according to the International Monetary Fund. Saudi Arabia reported Sunday that its economy shrank 3.8 percent year-on-year in the third quarter, driven by a 20.4 percent plunge in oil activity. Kuwait, Bahrain and Qatar are each expected to post double-digit contractions.

Details

• The Saudi numbers: The Saudi government said Sunday that the kingdom's economy contracted 3.8 percent from a year earlier in the three months through September. Oil activity fell 20.4 percent, by far the largest driver of the decline, according to the official figures.
• Who is hit hardest: The IMF expects double-digit contractions in Kuwait, Bahrain and Qatar, tied to their near-total reliance on the Strait of Hormuz to ship energy products. Oman is the only Gulf economy forecast to grow, with over 4 percent projected this year against 2.4 percent in 2025, helped by its Arabian Sea coastline.
• The damage on the ground: Saudi Aramco's headquarters and a critical pipeline were struck, and ships in the Strait of Hormuz are still catching fire from missile and drone attacks. Riyadh Air is busing international passengers to and from an alternate airport four and a half hours from its strike-damaged hub.
• What is cushioning it: Pipelines letting Saudi Arabia and the United Arab Emirates bypass the strait have kept oil moving, alongside an extensive US military operation shielding vessels transiting the waterway. Without those routes, the contraction would be deeper.
• The confidence shock: Aurelian Mali, vice president at Moody's Ratings in Dubai, said tourism, aviation, hospitality and real estate have been hit by the confidence shock and remain exposed to re-escalation. Prolonged elevated risk perceptions, he added, could damage non-oil models built on security and macroeconomic stability.
• Business pullback: The flagship Saudi investment conference has been postponed to next year. Exxon Mobil chief executive Darren Woods skipped the ADIPEC energy conference that opened in Abu Dhabi on Monday over regional security concerns, according to a person familiar with his thinking. Organizers said participation remained very strong without addressing his absence.
• Aviation traffic: Dubai International Airport, the world's busiest hub, is running below last year's levels as some international carriers keep their regional operations suspended.
• AI plans exposed: Qatar, Saudi Arabia and the UAE announced $120 billion in AI-related investment plans last year. Data centers in the Emirates and Bahrain were struck by Iranian drone swarms early in the war, and discussions are underway to disperse planned sites and build some underground.
• Investors still buying: Apollo Global Management last week announced a 10 percent stake in Mubadala Capital, the alternative asset arm of a $385 billion Abu Dhabi sovereign fund. Bahrain's Investcorp joined Saudi investors to buy a local fire safety company, and Advent set up in Abu Dhabi last month.
• Hardening the economy: Budgets are expected to shift toward resilience, meaning rerouted pipelines and higher military spending. The UAE, holding nearly $3 trillion in sovereign assets, has pledged to cut its dependence on the Strait of Hormuz to zero by scaling up alternative ports and pipelines.

Background

The war in Iran is at the start of its ninth month, running alongside a separate conflict in Yemen. Saudi Arabia and the UAE had spent years rebalancing away from energy dependence toward tourism, aviation and technology, marketing themselves as stable ground in a volatile region.

Between the lines

The rebound case rests on an assumption: IMF projections of 7.9 percent growth in Saudi Arabia and 18.8 percent in Qatar in 2027 assume hostilities taper enough to restore prewar energy conditions. The fund called the fallout highly uncertain. Moody's warning points the same way — the diversification sectors sold on safety are the ones a long war erodes first, even after oil flows resume.

What's next

Watch ADIPEC attendance in Abu Dhabi this week as a gauge of executive risk appetite, the rescheduled Saudi investment conference, Dubai airport traffic against last year, and whether data center plans shift underground.

Source: The New York Times