Gulf economies under fire
26 March 2026
When the first missiles and drones were fired at the GCC on 28 February, the region’s economic story pivoted abruptly, from long-term vision-building to near-term resilience.
The conflict is now the Gulf’s most consequential economic stress test in a generation. It is challenging the safe haven premium that underpins capital inflows, while disrupting the physical networks that keep the region’s economies running, from energy exports and shipping lanes to airports and tourism.
Over the past two decades, GCC governments have worked to pair diversification with an image of stability: open economies, predictable regulation and security that felt, to many investors, close to non-negotiable.
This crisis has reopened an older question last asked during the 1990 to 1991 Gulf War: not simply how fast the Gulf can grow, but whether it can remain investable and operational under sustained security risk. The early evidence is mixed and still emerging.
Energy infrastructure has been damaged and supply chains have been paralysed, but other parts of the economy, such as retail and construction, have continued to operate largely as normal.
LNG strike
The clearest and most quantifiable example of the economic toll came when Iranian strikes targeted Ras Laffan Industrial City in Qatar. The damage reported by QatarEnergy is significant. Liquefied natural gas (LNG)-producing trains 4 and 6, which account for about 17% of Qatar’s total LNG exports, need repairing. The expected revenue loss is $20bn a year.
In a statement, QatarEnergy president and CEO Saad Sherida Al-Kaabi said the repairs will take three to five years to complete, underlining the long-term impact on the Qatari economy. JP Morgan estimates that Qatar’s GDP could contract by 9% this year.
Qatar is not the only GCC state to have suffered damage to its energy infrastructure. Bahrain, Kuwait, Oman, Saudi Arabia and the UAE have all had energy assets targeted.
In addition to damage caused by missiles or drones, logistics problems triggered by the closure of the Strait of Hormuz are having a material impact. Aluminium Bahrain (Alba) has implemented a controlled shutdown of reduction lines 1, 2 and 3, one example of how supply chain paralysis is spreading into industry.
By idling 19% of its production capacity, approximately 308,000 tonnes a year, Alba is attempting to preserve raw material inventory and prioritise the operational stability of its newer, more efficient lines 4, 5 and 6. However, the macro implications for Manama are severe. Alba contributes 12% to Bahrain’s GDP, with the broader aluminium sector, a vital driver of the kingdom’s Economic Vision 2030, accounting for over 15%.
The conflict is now the Gulf’s most consequential economic stress test in a generation
Dubai disruption
In Dubai, where the economy has made great strides in diversifying away from oil and gas and into sectors including tourism, aviation and real estate, the disruption caused by the war is also taking a toll. Despite a few high-profile attacks, the city’s infrastructure remains almost entirely intact. The problem is that its accessibility has been halved. As of late March, data shows flight capacity hovering at 50% across 70% of destinations. Hotels in the emirate are operating at single-digit occupancy levels.
In response, Dubai has begun reviewing support packages for the sector, including fee relief and the removal of penalties for delayed payments. This stance mirrors Dubai’s response to the Covid-19 pandemic, a crisis the emirate ultimately navigated well. The plan is that an initial focus on resilient source markets, such as Russia and Africa, will allow the tourism sector to move onto the road to recovery.
The Dubai property market is perhaps the most sensitive barometer of international confidence. For three weeks, the market has lived in a state of suspended animation. While AED11.9bn in real estate sales were recorded in early March, analysts warn of a significant time lag. These figures represent registrations of sales agreed weeks or months ago, and the true impact of the 28 February escalation may not be reflected in official data until late March or April.
Early indicators from brokers and market analysts point to falling transaction volumes. The narrative of safety and guaranteed returns that fuelled the post-pandemic boom, and attracted billions in overseas wealth, has been dented. Investors are increasingly seeking reassurance that their capital is not anchored in a conflict zone.
Rather than cutting headline prices, which would damage long-term community values, some developers are offering registration waivers, 0.5% monthly payment plans and extended grace periods.
More than 15,000 flights were cancelled at seven major regional airports in the first week of March
Aviation strain
With airports in Bahrain, Riyadh, Kuwait, Dubai and Abu Dhabi all targeted during the conflict, the Middle East’s aviation sector is grappling with unprecedented operational friction. According to Fitch Ratings, more than 15,000 flights were cancelled at seven major regional airports in the first week of March alone.
The main international hubs, Dubai, Abu Dhabi and Doha, are facing a sharp spike in operating costs. Rerouting around restricted airspace requires longer flight paths, additional technical stops and increased expenses for crew overtime. While carriers have buffers through fuel hedging, ranging from 50% to 80%, the sheer volume of refunds, vouchers, and accommodation for 1.5 million displaced passengers is weighing on balance sheets.
The aviation insurance market is also shifting. With insurers holding the right to cancel war cover during active conflict, the risk profile of regional fleets is being repriced in real time.
If the conflict remains short-lived, the impact on annual profitability may be temporary. But a prolonged period of airspace instability would test the flexibility of the region’s transport infrastructure at a time when aviation is meant to be a central pillar of growth.
Banking support
Underpinning all sectors is the banking system, and the response from regional regulators has been swift. The Central Bank of the UAE (CBUAE) has approved a Financial Institution Resilience Package that aims to both reassure and protect the economy.
The UAE’s banking sector entered the conflict from a position of strength, with foreign exchange reserves exceeding AED1tn ($272bn) and a capital adequacy ratio of 17%. By allowing banks to tap reserve balances up to 30%, and providing term liquidity facilities in both dirhams and dollars, the CBUAE is signalling that the system remains liquid, capitalised, and ready to support corporate and individual borrowers through temporary classification flexibility.
The outlook across the GCC is not uniform. S&P Global Ratings has flagged Bahrain and Qatar as more exposed to potential capital outflows. In a severe stress scenario, the region could see domestic deposit outflows of up to $307bn. Bahrain’s retail banks are under scrutiny due to recent growth in external debt and thinner funding buffers.
The risk of non-performing loans also looms. S&P suggests that, in a high-stress scenario, total losses across the GCC’s 45 largest banks could reach $37bn, with the logistics, tourism and real estate sectors bearing the brunt. The banking sector is the ultimate backstop. While it is well-placed to navigate the conflict, much will depend on how long the economic impact lasts.
Brand challenge
For decades, the GCC has positioned itself as a place where capital is safe, taxes are low and the lifestyle is aspirational. The conflict that began on 28 February has undermined that perception of safety. Restoring it will be the key challenge for the coming years.
All is far from lost. The region’s military defences have performed well, and casualties have been kept to a minimum. There has been economic damage, especially to energy infrastructure and airports, but elsewhere cities across the region have continued to function, with residents leading mostly normal lives.
The region will be hoping it can demonstrate that it remains functional and safe even during conflict. While many who remained in the region may concur with that sentiment, the more difficult task will be convincing the rest of the world. Adding to that problem is the likelihood that the regime in Tehran remains, leaving the lingering possibility of further strikes in the future.
That possibility will be a hurdle for investment decisions to overcome. The test for the region’s leaders is no longer only about building the world’s tallest buildings or largest smelters. It is about proving they can protect them.
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