The intensification of hostilities between the United States and Israel against Iran has heightened geopolitical uncertainty across the Middle East, with meaningful downside risks should military escalation prove prolonged and lead to complete and prolonged closure of the Strait of Hormuz. These developments occur against a backdrop of uneven fiscal and external buffers across the region. This non-rating action commentary by Capital Intelligence Ratings (CI Ratings or CI) assesses potential implications for the GCC member states, as well as Jordan, Egypt, Türkiye and Cyprus.
Baseline Scenario and Assumptions:
CI Ratings’ baseline scenario assumes that the escalation remains short-lived at present, with limited and temporary disruptions to hydrocarbon production, energy infrastructure and key shipping routes, and no material spillovers to domestic political stability across the region.
Under this scenario, global energy prices are expected to rise, supporting fiscal and external positions for hydrocarbon exporters. Capital market access is projected to remain available for Saudi Arabia, Kuwait, Qatar, the UAE and Oman, albeit at higher-risk premia. Nevertheless, heightened uncertainty and the broad-based nature of the Iranian retaliation are likely to sustain financial market volatility, affecting issuance timing, maturities and refinancing costs.
While physical trade and shipping disruptions are assumed to be temporary, higher maritime insurance premia, freight rates and logistics costs could persist, contributing to imported inflation and modest pressure on external balances, particularly for energy-importing and trade-dependent economies.
Accordingly, the economic impact is expected to depend primarily on country-specific fiscal and external buffers, exposure to regional trade and capital flows, reliance on external financing, and dependence on energy imports or exports. Elevated uncertainty may result in investment deferrals rather than outright cancellations, moderating near-term non-hydrocarbon growth. Moreover, workers’ remittances inflows could moderate in Jordan and Egypt. Tourism is also expected to slow in the countries affected by this escalation. Under the baseline, no significant deterioration in macroeconomic stability is assumed at present.
Risks to the Baseline Scenario:
Downside risks are significant and relate mainly to the potential targeting of hydrocarbon assets in neighbouring states, either directly or via Iran-aligned militias. High-impact risks also include prolonged disruption to maritime trade, particularly through the Strait of Hormuz, as well as attempts to destabilise neighbouring countries through indirect military or demographic minorities’ channels.
A material escalation, sustained disruption to shipping routes, or a prolonged tightening of market access could warrant a reassessment of sovereign risk profiles across the region.
Assessment:
CI views that, under the baseline scenario, most GCC sovereigns are expected to absorb a short-term, moderate external shock.
In Saudi Arabia, escalation risks could weigh on non-hydrocarbon growth ambitions under Vision 2030 through weaker foreign direct investment (FDI) and tourism, despite temporary fiscal gains from higher oil prices. Elevated volatility could complicate fiscal planning and project financing, while a prolonged conflict could increase defence and social spending pressures. Banks remain well-capitalised, though prolonged uncertainty could dampen credit growth to investment and tourism-related sectors, and relatively raise funding costs. CI notes that prolonged escalation could also amplify liquidity pressures in the Saudi banking system; however, support from the Saudi Central Bank could relatively ease these pressures.
Qatar benefits from long-term LNG contracts and substantial sovereign wealth assets, limiting near-term vulnerability. However, prolonged disruption to the Strait of Hormuz or shared gas infrastructure would pose material risks to exports, external balances and inflation dynamics. The banking system is supported by strong sovereign backing and liquidity, with limited near-term impact expected under the baseline. However, cross-border funding could become costlier and less available under downside scenarios.
In Oman, reform implementation and improved buffers enhance resilience, although elevated geopolitical uncertainty exposes the sovereign to higher refinancing risks. Omani banks are deemed resilient at present, although extended trade or shipping disruptions could tighten liquidity and refinancing conditions while leading to a decline in government deposits in the banking sector.
The United Arab Emirates faces heightened risks to non-hydrocarbon activity, particularly in Dubai, through weaker tourism, FDI and capital market flows. A prolonged escalation could adversely affect main sectors in the UAE, such as logistics and real estate, while further intensification of the conflict could trigger flight of capital outside the country. Higher oil prices mainly benefit Abu Dhabi, partly offset by higher defence spending and potential contingent liabilities linked to government-related entities (GREs). Financial support from Abu Dhabi remains a key stabilising factor. Emirati banks remain resilient, but weaker confidence or stress among Dubai-based GREs could transmit into asset-quality pressures under a more adverse scenario.
Kuwait remains highly exposed to oil price volatility. While higher prices would support fiscal and external balances under the baseline, a prolonged disruption in the Strait of Hormuz would severely constrain export capacity, leading to revenue shortfalls and liquidity pressures. Strong capital buffers support stability in the Kuwaiti banking system at present, though prolonged oil export disruptions could weaken government deposit flows and credit demand.
Bahrain is particularly vulnerable given its proximity to Iran, hosting of US naval assets and weak fiscal strength. Investor sentiment and tourism could weaken, while very high public debt and weak external buffers heighten reliance on regional support. CI notes that the Bahraini wholesale banks are vulnerable to confidence and funding shocks amid heightened regional tensions. While capitalisation and liquidity are adequate at present, prolonged geopolitical stress could increase wholesale funding costs, pressure liquidity and weaken profitability, particularly if investor sentiment and regional financial flows deteriorate.
In Jordan, spillovers could materialise through energy supply risks, weaker tourism and remittances as well as delayed investment. Any prolonged disruption to gas imports from Israel would pressure fiscal and external balances, should it materialise. The strength of the Jordanian banking system remains moderate at present. However, banks can be exposed to asset quality risks and lower profitability stemming from slower growth, weaker tourism and softer remittance linked deposits.
Egypt remains highly sensitive to regional instability via tourism, Suez Canal revenues, energy linkages and investor sentiment. Higher food and energy import costs could re-accelerate inflation and renew financing pressures. The banking system remains exposed to sovereign and FX liquidity risks, with renewed inflation or capital outflows potentially constraining credit conditions.
For Türkiye, sustained escalation would raise energy import costs, complicate disinflation, widen the current account deficit and increase reliance on short-term external financing, amplifying rollover and exchange-rate risks. Banks remain highly sensitive to external financing conditions, with escalation risks amplifying rollover, FX liquidity and asset-quality pressures.
Finally, risks to Cyprus remain more moderate but are rising, reflecting vulnerability to higher oil prices as a net energy importer, impact on tourism and potential geopolitical exposure related to the presence of UK military bases. Banks are well-capitalised, though higher energy costs and elevated geopolitical risk could modestly affect confidence and asset quality.
CONTACT
Dina Ennab
Sovereign Analyst
E-mail: dina.ennab@ciratings.com
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