The ongoing conflict between the US-Israel alliance and Iran has entered its sixth week, causing significant damage across energy infrastructures, airports, and commercial sectors in the Gulf Cooperation Council (GCC) nations. This tumultuous situation underscores the pressing need for the GCC to reassess the security of its energy exports, which are increasingly at risk.

Impact on Energies and Exports

The closure of the strategically vital Strait of Hormuz has emerged as an economic disaster for the GCC, effectively halting oil and gas exports. This has jolted the region’s economies, compelling leaders to recognize that energy export security cannot merely be classified as a matter of national safety. The fallout from drone and missile attacks has resulted in a noticeable dip in tourist numbers and the withdrawal of high-net-worth investors from key financial hubs such as Dubai and Abu Dhabi. Nevertheless, the UAE’s advanced air defense systems and crisis management strategies have played a crucial role in restoring some degree of public confidence.

The broader fiscal repercussions of the conflict are not yet fully understood. However, various components are emerging: increased defense expenditures, significant reconstruction expenses, and a stark drop in oil and gas revenues due to the blockade of the Strait of Hormuz. Analysts predict a substantial financial impact, with investment banks like Goldman Sachs estimating that countries such as Qatar and Kuwait could see their Gross Domestic Product (GDP) shrink by as much as 14% if the conflict persists until late April.

Assessing Economic Stability

Despite the turmoil, it’s noteworthy that no prominent credit rating agency has downgraded the sovereign debt of GCC countries since the outbreak of war, with Bahrain facing a downgrade due to pre-existing public finance issues rather than current geopolitical troubles. Financial experts are grappling with the cumulative effect of rising military costs, reconstruction needs, and the severe hit to energy revenue—factors that could lead to economic losses surpassing those experienced during the COVID-19 pandemic.

Moreover, borrowing costs in the region are expected to jump sharply. An increase in the yield of US Treasury bonds, coupled with a higher risk premium tied to the ongoing conflict, will drastically elevate funding costs across various sectors, from sovereign issuance to corporate borrowing. The financial environment is becoming increasingly tight, suggesting that economic recovery will demand more than just time.

Long-term Implications for GCC Markets

The United Nations has estimated that direct damages resulting from the war have already exceeded $200 billion, not taking into account losses from the tourist sector or petrocurrency revenues. These figures highlight a volatile environment where GCC currencies are pegged to the US dollar, rendering significant monetary easing nearly impossible for regional central banks. With asset markets already under strain, the burden of macroeconomic adjustments will be felt predominantly in the equity sector.

For instance, Emaar Properties has seen its shares plummet by over 35% from pre-war highs, illustrating the fragile state of the real estate market. Additionally, the aviation sector in Dubai, vital to the emirate’s economy, is likely to suffer from soaring jet fuel prices and dwindling tourist numbers.

Although the GCC economies face uncertainty, the war has ignited new challenges and risks. With geopolitical tensions showing no signs of abating, a persistently elevated risk premium on regional assets seems inevitable, further complicating the financial landscape for GCC nations.

In summary, the multifaceted effects of the US-Israel war with Iran extend beyond immediate economic damage, reshaping investment climates and posing long-term risks for the Gulf economies.