RIYADH: Gulf Cooperation Council economies are holding firm amid regional geopolitical tensions, with strong fiscal buffers and policy interventions helping to cushion financial markets, even as Oxford Economics warns of tightening conditions and softer growth prospects.
Despite this underlying resilience, the US-Israel war with Iran continues to tighten financial conditions across the region and test investor confidence in key markets, according to an analysis by Oxford Economics.
The report said that although a ceasefire is currently holding, the conflict is still disrupting economic activity across the GCC region.
The analysis highlighted Bahrain as the most vulnerable economy in the region, with gross government debt exceeding 130 percent of gross domestic product. The conflict, which began on Feb. 28, has triggered significant regional disruption, including retaliatory strikes and the temporary closure of the Strait of Hormuz affecting energy markets and trade across the region.
“Although most GCC sovereigns carry relatively little debt, Bahrain stands out. Its debt is above 130 percent of gross domestic product. Bond markets have sold off but have started to rally since the ceasefire announcement. Bahrain’s spreads have now fallen back below the pre-war level, thanks in part to currency swap-lines offered by the UAE,” said Azad Zangana, head of GCC macroeconomic analysis at Oxford Economics and author of the report.
He added that while sovereign bond markets have shown some recovery, corporate spreads remain elevated, particularly for high-yield sukuk, indicating persistently higher borrowing costs that are likely to constrain investment and force cost adjustments across businesses.
Oxford Economics has downgraded its outlook for the region, now projecting GCC real GDP to contract by 0.2 percent this year, a sharp revision from its earlier forecast of 4.4 percent growth. The downgrade reflects reduced oil production, weaker exports, and declining tourism linked to the conflict.
The report also noted that international investors have been reducing exposure to regional assets in response to heightened uncertainty, tightening financial conditions despite strong foreign reserve positions across most GCC states. Equity markets have also come under pressure, with Bahrain and the UAE underperforming regional peers.
In the UAE, divergence between Abu Dhabi and Dubai has become more pronounced, with Dubai facing greater pressure due to its real estate sector’s high exposure to foreign demand and a large pipeline of incoming supply. Credit markets have reflected this stress through wider spreads on developer debt.
Liquidity strains have also emerged in parts of the UAE banking system, prompting intervention from the central bank, which introduced a large-scale resilience package including easier access to liquidity, temporary relief on funding and capital buffers, and greater flexibility in loan classification.
Separately, Dubai approved a 1 billion dirham ($272.26 million) economic support package aimed at easing financial pressures, strengthening economic flexibility, and supporting businesses and households amid current conditions.
At the same time, CBRE offered a more stable view of the UAE property sector, noting that office markets in Dubai and Abu Dhabi remained tight in the first quarter due to limited new supply. Average office rents in Dubai rose 14 percent year on year, while prime rents increased 16 percent, with occupancy holding at around 95 percent.
Oxford Economics said restoring investor confidence, particularly in equity and real estate markets, will be critical to reducing medium-term risks and supporting stability across the region as it navigates the post-conflict environment.
