Nearly six months since the start of the Iran war, Gulf countries have weathered serious attacks on their infrastructure. This dynamic has increased talk about the sustainability of the business models of Gulf Coordination Council (GCC) countries, which have thrived on the idea that they are safe places where the world can come together to do business. And yet, their bond markets have held up relatively well in the face of missiles and drones. To dig into the reasons for this, we turned to Eric Fine, a nonresident fellow in the MENA Futures Lab and an experienced investor in emerging market debt. Below, he answers seven burning questions about GCC debt and borrowing.
1. How has the Iran war impacted the GCC bond market?
Core GCC countries (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar) all saw spreads grind higher, but not enough to become a “screaming buy” opportunity. The GCC stalwarts saw their credit spreads (the difference between their bond yields and certain benchmarks) languish in the war—they are torn between their credit strength and the profound challenges they face as a result of the Iran war. More precisely, the first several weeks after the start of the war on February 28 saw these spreads reluctant to budge or even tightening, reflecting market confidence. As the markets absorbed the war news, these spreads started widening slightly, but not a lot (see chart below). As a result, they remain in between two worlds—one world pricing their current credit risk, the other worrying about longer term questions.
Oman was a winner. Oman was the only major GCC country to see its credit spreads not widen during the Iran war. This reflects its upgraded geostrategic profile based on geography, as it borders the Strait of Hormuz, but also its less fractured relationship with Iran.
Bahrain became the clear high-variance bellwether. This is logical given the country’s high debt levels and lower reserves compared to the region, and its resultant reliance on Saudi Arabia for financial support. Because the Gulf, generally speaking, has high liquidity buffers and deep and broad market access (more on this below), none of these credit spreads widened materially. Even if most GCC countries faced arguably existential challenges, the market was rightly unwilling to sell such strong credits. Bahrain was the only credit spread that at least partially reflected Iran war risks.
2. Why did GCC spreads remain remarkably stable despite the conflict?
The GCC proved to have a wartime borrowing machine. The chart below details actual credit deals for sovereigns (governments) and quasi-sovereign entities (i.e. state-owned oil companies) in private and public credit during 2026. The bottom line is that, despite the war, 2026 is on course to beat 2023 and 2024 in comparable financings.
3. How big are GCC sovereign bond markets?
The GCC debt capital market stands at approximately $1.2 trillion outstanding—roughly $750 billion in hard currency (almost entirely US dollars, reflecting the dollar pegs) and about $450 billion in local currency (dominated by the Saudi riyal). The hard currency sovereign/quasi-sovereign portion represents approximately 14–16 percent of the JPMorgan Emerging Markets Bond Index Global Diversified, making the GCC collectively the largest single regional bloc in the premier emerging market hard currency benchmark. For scale, that weight is comparable to all of Latin America’s investment-grade sovereigns combined, or roughly double Mexico alone.
4. Why should policymakers care about sovereign credit spreads?
These spreads are the basis for pricing a sovereign’s borrowing and capital raising activities; the GCC has large fiscal and external borrowing requirements, and oil prices create risks of higher requirements. The war-driven price windfall of 2026 masks that risk rather than resolving it. At the price levels that prevailed in 2025, roughly two-thirds of GCC sovereigns run fiscal deficits ranging from moderate to severe, according to the International Monetary Fund, and the cost at which they access international capital markets has a direct impact on their debt trajectory. All GCC countries have a debt to gross domestic product (GDP) ratio below 40 percent and manageable fiscal deficits in the 3–5 percent of GDP range, other than Bahrain at 133 percent and 11 percent of GDP. If credit spreads do not remain stable—credit rating downgrades are a risk, for example—a self-reinforcing trajectory can take hold. Higher debt service costs worsen the deficit, which worsens the debt trajectory, which widens spreads further.
Currency pegs complicate this, though not for the reason usually given. Most of the region’s debt is dollar-denominated, so significantly reducing the value through inflation was never available regardless of the exchange rate regime. What the pegs actually cost is monetary autonomy: a fixed rate combined with an open capital account means Gulf central banks track the Federal Reserve whether or not domestic conditions warrant it. More consequentially, the peg removes the shock absorber. Fiscal stress that would show up as currency depreciation elsewhere transmits directly into reserves and onto the peg itself. This is why Bahrain has never really been a standalone credit—its spread prices the willingness of its neighbors to support it, as the 2018 assistance package demonstrated.
5. What should investors be watching in the coming months?
What the market needs to more fully move on from Iran war-related risks is, number one, clarity on the basic security framework. Two, Gulf country business models need to be cemented or changed; UAE’s service-oriented economy and Saudi Arabia’s heavily financialized (i.e., financing-dependent) system are key examples of new unanswered questions generated by the Iran war.
In addition, UAE Central Bank Governor Khaled Mohamed Balama raised the idea of a swap line with US Federal Reserve and Treasury officials, including Treasury Secretary Scott Bessent, during the International Monetary Fund/World Bank spring meetings in Washington. The UAE warned it may have to use the Chinese yuan for oil sales if it runs short on dollars—a classic dollar-loyalty leverage play. New Federal Reserve Chairman Kevin Warsh indicated that the Fed would defer to Treasury on such issues, but the issue remains unresolved.
6. What does your own investment process say about GCC sovereign credit?
The bonds are cheap, using ratings or a purely quantitative process that does not incorporate non-systematic risks such as wars. These countries deserve their credit ratings on the numbers, in our view. But we are underweighting GCC in our emerging market portfolio because the non-systematic risks from the war are too high for the small increase in spread that the bonds now generate. Luckily for the GCC, not all investors have our level of flexibility. The GCC and many investment-grade sovereign borrowers depend on dedicated Asian investors who are strongly inclined to base decisions on purely a ratings basis. So, the questions these buyers are asking aren’t as acute as the questions we are asking because we do not have to have this Gulf exposure in our funds, while many of these Asian investors have no alternatives.
7. What does Kuwait’s successful sovereign bond offering suggest about the financial marketplace?
Despite fiscal pressures arising due to war costs and production hits, global investors continue to view GCC sovereign credits favorably. The region retains exceptional access to international capital markets, as detailed above. Even Bahrain, the riskiest sovereign credit in the GCC, was recently able to issue one billion dollars at approximately 7.5 percent interest, underscoring the depth of investor appetite for the region. The wartime borrowing machine is proving its mettle so far.
Eric Fine is a nonresident fellow at the MENA Futures Lab, part of the Atlantic Council’s Rafik Hariri Center for the Middle East. He is a portfolio manager at VanEck with more than thirty years of experience investing in emerging market sovereign debt.
Further reading
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Image: International Monetary and Financial Committee (IMFC) Chair and Saudi Arabia's Minister of Finance Mohammed Al‑Jadaan and International Monetary Fund (IMF) Managing Director Kristalina Georgieva look on as reporters raise their hands during a press briefing at the IMF/World Bank 2026 Spring Meetings in Washington, D.C., US April 17, 2026. REUTERS/Elizabeth Frantz