Whenever the conflict involving the United States, Israel, and Iran comes to a close, the Arab Gulf nations that comprise the Gulf Cooperation Council (GCC) must begin to construct a new economic reality. How will these economies reinvigorate growth, restore confidence, and position themselves for the next phase of development?
All six GCC nations were affected, directly and indirectly, by the conflict. The most immediate economic impact stems from disruptions to commodity flows. Roughly one third of the world’s seaborne crude oil trade passes through the Strait of Hormuz, along with one fifth of liquefied natural gas (LNG) shipping, and 13 percent of seaborne chemicals trade, among many other vital commodities. The opportunity cost of disrupted exports is therefore material. Beyond these direct losses, second-order effects will ripple through tourism, real estate, transportation, and broader service sectors. While they will suffer a contraction in gross domestic product (GDP), most GCC countries have sizeable sovereign wealth funds, fiscal buffers, and access to capital markets. Bahrain remains the notable exception, given its elevated debt burden.
These shocks are severe. But they can be overcome and managed, assuming the security situation with Iran can be resolved in a sustainable manner. The ongoing forces shaping the Gulf economies are structural, and they predate the current conflict.
The region’s economic trajectory over the past five decades has been defined by the interaction between oil wealth and rapid population growth. The surge in income during the oil boom of the 1970s created the appearance of permanently abundant prosperity. But as populations expanded, per capita income growth proved far more fragile than expected. The result was a sharp contraction in the 1980s and 1990s, followed by a recovery in the 2000s that has since diverged across countries.
This pattern reveals a simple but powerful constraint: oil revenues may grow, but they must be distributed across an ever-expanding population. The denominator has outpaced the numerator. As a result, modernization, diversification, and institutional reform have not been optional; they have been economically necessary. Nowhere is this pressure more visible than among the GCC’s youth. With roughly 50 percent of the population under twenty-five, a digitally native generation is entering the workforce with expectations that the traditional model can no longer meet.
By the early 2010s, this reality became unmistakable in Saudi Arabia. While oil continued to lift GDP per capita, the magnitude of those gains diminished and proved insufficient to offset population growth and labor market pressures. The deceleration in income growth signaled that Saudi Arabia’s model could no longer deliver sustained prosperity. Vision 2030, the modernization plan announced in 2016, was not simply aspirational; it was a structural response to a system that had begun to plateau.
Elsewhere in the Gulf, different models emerged. The United Arab Emirates pursued early diversification into trade, logistics, aviation, and finance, reducing its dependence on oil cycles and achieving more stable income growth. Qatar followed a different path, transforming its economy through large-scale investment in LNG. This produced extraordinary gains in GDP per capita, though within a model still deeply tied to energy markets. Kuwait, by contrast, has largely preserved wealth rather than transformed its economic structure, resulting in more cyclical and less dynamic growth. Bahrain and Oman, facing more limited hydrocarbon resources, have pursued diversification out of necessity, though with more gradual progress.
The result is a region no longer defined by a single economic model, but by a set of diverging strategies shaped by common constraints. If structural divergence defines the long-term outlook, financial markets offer a real-time test of whether that divergence is being recognized.
Sovereign credit markets, particularly through credit default swap (CDS) spreads, provide a useful lens. A credit default swap is a derivative that serves as protection against sovereign default. The buyer pays an annual premium. If the issuer defaults, the seller compensates for losses on the debt. Thus CDS levels are the market’s real time perception of sovereign credit risk. CDS are priced in basis points, the higher the number the risker and more expensive the cost to insure against a default With the conflict in an uneasy state of limbo, CDS prices have come down from their highs, as shown in the table below. Kuwait and Qatar have the lowest CDS levels, reflecting their strong financial conditions. The UAE has the next best credit, according to the markets, while Saudi Arabia and Oman trail behind. Only Bahrain has elevated CDS costs, a function of its large debt burden.
Yet a closer look reveals a more nuanced picture. Kuwait has the strongest credit according to the CDS market, but it also provides the best value when measured by spread to volatility at 18.9 basis points. Volatility in the financial markets is a measure of risk, so a higher spread-to-volatility ratio implies the investor is being compensated for the level of risk being taken. Qatar exhibits a relatively low CDS-to-volatility ratio at 4.6 basis points despite higher volatility than Kuwait. Saudi Arabia and the UAE also provide relative value in terms of their spread-to-volatility ratios. Oman’s spread to value ratio is lower than the UAE and Saudi Arabia even though it has a lesser credit rating. Bahrain, meanwhile, continues to trade with higher volatility, consistent with its more constrained fiscal positions, but does not generate a high CDS-to-volatility ratio, at 5.7 basis points.
Taken together, these dynamics point to a partial misalignment between structural transformation and market perception. Economies that have made meaningful progress in diversification are not always fully differentiated in market pricing, while those that remain exposed to legacy risks may still benefit from historical assumptions of strength.
In a post-conflict environment, this gap may prove increasingly consequential. The next phase of Gulf economic development will not be defined by energy alone, but by the ability of these economies to generate sustainable growth independent of it and by the willingness of markets to recognize that shift.
Khalid Azim is the director of the MENA Futures Lab at the Atlantic Council’s Rafik Hariri Center for the Middle East.
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Image: A general view shows participants during the last day of the Web Summit in Doha, Qatar, on February 26, 2025. The largest technology conference in the Middle East this year has 25,747 attendees from 124 countries, 1,520 startups, 723 investors, and 168 partners, with AI emerging as the most represented industry. (Photo by Noushad Thekkayil/NurPhoto via Reuters)