The Non-Oil economic sectors remain under strain, with near-term performance uneven across the economies

Overview

Four weeks on from the start of the Iran war, and the conflict continues to severely affect the Gulf economies. Iran’s retaliatory attacks on the Gulf states have declined but are still disruptive to both the hydrocarbon and non-hydrocarbon sectors. Helped by diversification efforts, the non-oil sectors have expanded in recent years, increasing their contribution to economic growth. But the support from non-oil sectors might prove limited in the current situation. After looking at the impact from the conflict on the hydrocarbon sector of the Gulf states and the implications for fiscal and export revenues (Gulf States: Damage to Energy Infrastructure and Shutdowns Will Reduce Exports and Fiscal Revenues for Longer), in this commentary we take a look at the impact on the non- hydrocarbon sectors so far, including manufacturing and services. The impact varies among the Gulf Cooperation Council (GCC) economies. In our view, the rebound in economic sentiment and activity will depend on how quickly the security situation normalises and is sustained over time.

Tourism Is Bearing the Brunt of the War’s Impact, with Dubai at the Forefront

Among the non-hydrocarbon sectors of the Gulf economies, the tourism and travel sector has been the most affected by the latest escalation of the Middle East conflict, owing to airspace closures and security incidents and concerns. However, the effect has been uneven across the Gulf economies, with Saudi Arabia and Oman largely unaffected and potentially benefiting from the re- routing of air travel in the region. In the United Arab Emirates (UAE) and Qatar, the airspace has reopened, although their international airports continue to report some disruptions. In Bahrain and Kuwait, the airspace remains largely closed. Moreover, the ongoing security situation has also led to the cancellation of major sporting events that normally attract large volumes of visitors and support the hospitality sector. The cancellations include the Bahrain and Saudi Arabia grands prix, both planned for April 2026, and some international football matches.

The contribution of the tourism sector to the economy is larger in the UAE, Qatar, and Bahrain, compared to Saudi Arabia, Oman, and Kuwait. The sector accounts for about 12%-14% of GDP in the UAE, Qatar, and Bahrain. Within the UAE, Dubai is particularly reliant on tourism. The attacks on a luxury hotel and on Dubai International Airport, one of the busiest in the world before the Iran war and key for travel connectivity, have had a major impact on the Emirate and on its image as a safe haven in the region. The UAE has received more attacks from Iran than the other Gulf states.

Trade Hubs, AI Infrastructure, Financial Centres and Aluminium Have Also Been Affected Other economic sectors have also suffered the impact of the conflict, including from direct missile and drone attacks. Dubai is a hub for regional trade and business and financial services. Dubai’s Jebel Ali Port, hit by debris from an intercepted missile at the beginning of March, led to some disruption. Three data centres in the UAE and Bahrain were hit by Iranian drones in the first week of the conflict. Security concerns have also affected Dubai International Financial Centre (DIFC) after some drone attacks. The attacks have raised concerns about the businesses operating environment in the Gulf states. Adverse investor sentiment could also affect property markets, with Dubai particularly vulnerable to a downturn given the strong growth in property prices seen in recent years. To prevent strains in the UAE financial system, the Central Bank of the UAE adopted a resilience package to allow banks access to liquidity and to provide flexibility in the use of excess liquidity and capital buffers to support the UAE economy.

On manufacturing, Bahrain is particularly exposed to disruptions in aluminium exports, which account for over 25% of its total exports. One of the biggest aluminium smelters outside China is based in Bahrain. With the Strait of Hormuz still closed, part of aluminium exports has been re- routed via the Saudi port of Jeddah. Aluminium also accounts for about 25% of the UAE’s exports, but it accounts for less than 1% of UAE GDP.

A Weakened Services Sector Won’t Provide a Needed Boost to Economic Growth

Given the reliance of the Gulf States on hydrocarbons, the recent damage to energy infrastructure and reduction in hydrocarbon production are expected to bring about a contraction of this sector. In our view, this drag on the economy could lead real GDP to contract in the most affected Gulf economies, especially if the full resumption of hydrocarbon activity is further delayed and the non- oil sectors underperform. Non-hydrocarbon sectors account for about 60% of GDP in Saudi Arabia and Kuwait, for around 65% in Qatar and Oman, and for close to 75% in the UAE and Bahrain.

The non-hydrocarbon sectors of Gulf economies have performed robustly over the past years, which has helped offset the economic impact from oil production cuts agreed within the OPEC in recent years supported economic growth (Exhibit 1). However, during the present conflict, the non- hydrocarbon sectors are also being hit. With some of these sectors expected to soften, the economic growth in most Gulf economies is unlikely to receive a much-needed boost from the non-oil sectors.