- Nine months into the war, with a volatile recovery underway, Hormuz exposure and war impact continues to decide who loses most in the GCC. GDP is set to contract by -4.0% in 2026 (-8.2pps from previous growth forecasts). Hormuz-locked economies (Kuwait, Qatar and Bahrain) will see the largest contractions, and Saudi Arabia and the UAE absorb a second layer of impact due to partial Hormuz bypass options, while Oman has benefited as a bridge to global markets and the region. The real economy has been recovering, but the Houthi strikes on the Riyadh airport were a stark reminder that the rebound is still at risk from events on the ground. Especially impacted are domestic activity, which suffered its sharpest shock since Covid-19, and tourism flows (-22% y/y in H1 2026). Hydrocarbon economy is set to contract by -8.5% y/y and trade by -5.5% y/y. Dubai's real estate segment has corrected by 10.2% by September from its January peak, with further repricing not yet fully reflected. PMIs diverge: the UAE has stayed in expansion throughout the war and Saudi Arabia for six months to October 2026, while Qatar has been contracting since March. Meanwhile, higher food prices mean regional inflation is projected to more than double this year to 2.6%, with Qatar (4.5%), the UAE (4.5%) and Oman (3.9%) at the top. Borrowing costs are on the rise, with wider credit default swap spreads for the most exposed sovereigns (80% YTD in Bahrain, 58% in Qatar, 32% in Dubai and 26% in Kuwait), and portfolio inflows are plummeting (-48% in Saudi Arabia over March–August 2026 compared with the same period of 2025).
- Beyond the near-term shock, the war leaves a permanent scar and redraws the Gulf's economic map: USD790bn in lost future output over 2026-30 and a USD200bn reconstruction bill. Notably, the war accelerates a preexisting realignment away from mega-projects under the “Vision” programs and legacy hydrocarbon infrastructure towards a new energy map: including Hormuz bypass alternatives, causing a geographic pivot from the Gulf to the Red Sea, and sovereign-based priorities specially in strategic infrastructure: trade, transportation, electric grid, water, defense, and data centers, with new spending commitments adding up to USD380-400bn. Tourism and real estate face uneven recoveries, faster for domestic and regional demand than for international demand. Technology, especially AI-training focused data centers, should continue attracting investment as it remains a top priority across the region, while trade is set to recalibrate from old, maritime and Gulf-centered routes to new ones, strengthening regional integration.
- The war reorients the region inward: the shock is primarily fiscal, with a cumulative budget deficit of USD475bn over 2026-30, while the external cushion tightens as the current-account surplus roughly halves from its 2021-25 level. The gap, which increases to USD722bn including debt maturities, will be closed mainly through a substantial increase in new debt issuance (USD301bn) on top of rollover, complemented by drawing down FX reserves in line with previous oil shocks (USD125bn), and, as a last resort, transfers from SWFs (USD90bn). Externally, the cushion thins but holds: FDI dips around 16% from its pre-war path, but new opportunities (USD160bn) emerge for foreign capital in Hormuz-bypass infrastructure and defense. SWF repatriation will inject USD120bn into domestic investment, which means less Gulf demand for global fixed income over time. Heavier issuance means spreads are set to widen unevenly through 2030: Bahrain faces the largest repricing (100bps+), while highly rated sovereigns see limited issuance-driven widening, leaving geopolitical risk as the main driver of their spreads.