UAE and Oman Fiscal Resilience Outpaces Gulf Peers Amid Conflict

The United Arab Emirates and Oman are positioning themselves for stronger government finances this year, even as the broader Gulf region contends with the economic fallout of the ongoing US-Israel-Iran conflict. According to a recent analysis by Capital Economics, the surge in global oil and gas prices has more than compensated for the disruption to export volumes in these two markets. This resilience stands in stark contrast to the fiscal pressures mounting in neighboring states that rely more heavily on specific maritime routes for their energy exports.

While the regional war has strained budgets across the Persian Gulf, the UAE and Oman have effectively insulated themselves from the worst of the shock. The report highlights that these nations have leveraged higher commodity prices to offset logistical challenges, maintaining budgetary stability. In contrast, other Gulf Cooperation Council members are experiencing sharper fiscal squeezes, with some facing deficits that represent a significant portion of their gross domestic product.

Divergent fiscal trajectories in the Gulf

Capital Economics projects that budget balances in Saudi Arabia will worsen by approximately two percent of GDP this year. The situation is more acute in Kuwait and Bahrain, where deficits are expected to expand by about five percent of GDP. Qatar faces the most severe impact, with projections indicating a deterioration of up to ten percent of GDP. These figures reflect the varying degrees of exposure each nation has to the disrupted energy supply chains caused by the conflict.

The disparity in outcomes is largely driven by the geographical and logistical differences in how each country exports its hydrocarbons. The UAE and Oman have been able to maintain export flows despite the regional instability, benefiting from the high price environment. Conversely, states that depend exclusively on the Strait of Hormuz for their oil and gas shipments are finding it increasingly difficult to mitigate the financial impact of the ongoing disruptions.

Strait of Hormuz disruptions impact exports

The Strait of Hormuz, a critical chokepoint for global energy trade, has seen severe disruptions due to Iranian attacks on vessels. Oil tankers and other shipping traffic have faced damage and casualties, leading to significant supply constraints. According to the report, Brent crude prices surpassed $110 per barrel following the outbreak of the conflict, reaching a peak of $114 in May. These elevated prices have provided a temporary financial buffer for producers who can still move their goods, but the underlying trade friction remains a primary source of fiscal stress for the region.

Capital Economics assumes that these disruptions will persist until early next year, complicating fiscal planning for governments in the area. William Jackson, the firm’s chief emerging markets economist, noted that the lack of transparency regarding government spending plans and limited fiscal data makes precise forecasting difficult. However, the general trend suggests that nations with alternative export routes or diversified economic structures are better positioned to weather the storm than those with single-point failures in their logistics networks.

Reserves and debt burdens shape outlook

The UAE’s fiscal strength is further underpinned by its robust foreign exchange reserves and sovereign wealth funds, which provide a cushion against global financial volatility. The country’s decision to exit the OPEC oil group earlier this year also allowed it to accelerate investments in the hydrocarbon sector, boosting output during a period of high prices. This strategic move has improved its fiscal balance significantly, distinguishing it from neighbors that are less agile in adjusting their production and export strategies.

In contrast, Bahrain is identified as the most exposed economy in the region due to its limited savings and higher debt burden. Capital Economics highlights that the kingdom’s ability to avoid a currency devaluation or sovereign default may depend on continued financial support from other Gulf states. Qatar, while holding large savings, has seen its hydrocarbon revenues plummet by 97 percent year-on-year in the second quarter, primarily because its liquefied natural gas exports cannot be easily diverted or shuttled through alternative pipelines, leaving it highly vulnerable to the blockade of the strait.

Saudi Arabia occupies a middle ground, with its Red Sea exports providing some insulation from the Hormuz disruptions. However, the kingdom’s fiscal outlook remains sensitive to the status of its East-West pipeline. If this pipeline were to close for the remainder of the year, the deficit would widen by an additional 1.5 percent of GDP. The report suggests that while the deficit may only modestly widen in the base case, the pre-existing large deficit points to a rising public debt-to-GDP ratio and potentially higher risk premiums for the country’s sovereign debt.