Executive Summary
The regional outlook has deteriorated following the expiry of the US–Iran memorandum of understanding, with no clear path towards renewed negotiations. The United States has shifted towards increased economic pressure and threatened secondary sanctions against countries and businesses continuing to trade with Iran.
The continued disruption around the Strait of Hormuz remains the principal regional economic risk. Commercial shipping has been attacked, oil flows remain significantly below pre-war levels, and tanker operators are increasingly using less transparent routes and ship-to-ship transfers.
The conflict is also beginning to weigh more visibly on GCC markets and economic activity. Foreign investors were net sellers of GCC equities in July, while higher shipping, insurance and financing costs are creating additional pressure on infrastructure, energy and technology projects.
Within the GCC, Saudi Arabia continues to record strong investment activity, although the scale and financing requirements of Vision 2030 projects remain under scrutiny. The UAE has taken a significantly harder position towards Iran, while Dubai is experiencing slower property and tourism activity. Qatar’s corporate earnings have been affected by regional disruption, although digital payments and industrial diversification continue to expand.
Oman is benefiting from increased trade and its position as an alternative logistics route around Hormuz.
1. Geopolitical Outlook
US–Iran: Negotiations at an Impasse
The 60-day period established under the June US–Iran MoU has expired without a final agreement. The principal obstacles included disagreements over the implementation timetable, frozen Iranian assets, the interpretation of arrangements for shipping through Hormuz and divisions within both the US and Iranian leaderships.
President Trump has subsequently adopted a significantly harder position, calling for Iranian surrender and threatening severe secondary sanctions against countries and businesses providing economic support to Iran. The US administration has indicated that sanctions rather than an immediate return to large-scale military action may now be the preferred strategy.
Tensions have also increased between Washington and Oman, while Iran has issued further threats against US personnel and interests.
Outlook
The probability of a rapid diplomatic resolution has declined substantially. The immediate priority for markets is likely to remain the restoration of safe commercial navigation through Hormuz rather than a comprehensive political settlement.
2. Strait of Hormuz & Energy Markets
The security situation around Hormuz remains the most significant economic risk to the Gulf.
Two commercial bulk carriers were attacked during the week, bringing confirmed seafarer deaths in the region to at least 16. Shipping movements through the Strait have fallen sharply compared with pre-war levels.
Oil flows are continuing, but at substantially reduced and less transparent levels. Tankers are increasingly switching off transponders and using ship-to-ship transfers outside the Strait. Floating storage around Oman has also increased significantly.
Iranian oil exports have reportedly fallen to zero, while Saudi Arabia is increasingly using alternative routes through Yanbu, the Sumed pipeline and the Suez Canal.
Key implication: prolonged disruption would increase energy, freight and insurance costs and could place further pressure on global supply chains and inflation.
3. Regional Markets & Cross-Cutting Risks
Foreign investors were net sellers of approximately $415 million of GCC equities in July, with Dubai, Kuwait and Saudi Arabia experiencing the largest outflows. Abu Dhabi was the main exception, attracting approximately $148 million.
A global shortage of electrical transformers is also emerging as a constraint on GCC investment programs. Delivery times have increased to approximately 2.5 years, potentially delaying data centers, renewable energy and other major infrastructure projects.
The Gulf is also becoming increasingly important in the global competition over artificial intelligence, semiconductor access and technology investment, with GCC states balancing relationships between the United States and China.
4. Saudi Arabia
Saudi Arabia continues to attract significant investment despite the regional disruption. Investment licenses reached a record 9,000 in Q2, up 18% quarter-on-quarter and 252% year-on-year, with construction, trade and manufacturing accounting for much of the increase.
The Public Investment Fund reported strong 2025 financial results:
– Revenue increased 9% to $120 billion.
– Net profit more than doubled to $17 billion.
– Assets under management were approximately $906 billion.
– Borrowing increased by 27%.
– PIF’s contribution to the non-oil economy reached 11%.
However, impairment charges on non-financial assets remained significant, while higher financing costs and supply-chain disruption are creating challenges for large-scale Vision 2030 projects. Renewable capacity stood at 12.3GW at the end of 2025 against a 130GW target for 2030.
Aramco and Ma’aden have also established a major minerals exploration joint venture, focusing particularly on copper.
Assessment: Saudi investment momentum remains strong, but project prioritisation, financing discipline and execution will become increasingly important.
5. United Arab Emirates
Dubai inflation eased to 5.3% in July, although rents continued to rise and remained an important contributor to inflation.
The UAE property and tourism sectors are showing signs of moderation. Dubai residential price growth slowed sharply, while hotel occupancy fell to 56% in H1 compared with approximately 81% a year earlier.
L’Imad announced a $2.1 billion offer to acquire the remaining minority stake in AD Ports Group, reinforcing Abu Dhabi’s strategic focus on infrastructure and logistics assets.
The most significant development, however, was the UAE’s decision to suspend trade and financial transactions with Iran following attacks involving tankers and missiles. This represents the sharpest economic break with Iran by a GCC state since the conflict began.
Assessment: The UAE economy remains resilient, but geopolitical risk, tourism disruption and a harder stance towards Iran create new downside risks.
6. Qatar
Qatar’s listed companies reported an 11.4% year-on-year decline in H1 profits, with trade, shipping and insurance disruption identified as major factors.
Despite this, domestic digitalisation remains strong. Digital payments increased 40% year-on-year to approximately $29.3 billion in July, supported by rapid growth in bank transfers and instant payments.
Qatar is also continuing to pursue industrial diversification. A Qatari company has partnered with the UK’s Watt Electric Vehicle Company to establish the country’s first electric-vehicle manufacturing facility.
Assessment: Qatar’s economy remains fundamentally resilient, but corporate earnings are increasingly reflecting the impact of regional trade and logistics disruption.
7. Kuwait
Kuwait continues to advance infrastructure and institutional reforms.
An $8 billion KOC pipeline transaction attracted substantial international infrastructure investment, with insurance capital providing a significant portion of the financing.
The government has also approved legislation establishing specialised economic courts covering banking, capital markets, shareholder disputes and intellectual property. The reforms are intended to strengthen Kuwait’s investment and business environment.
Kuwait’s US Treasury holdings reached a record $68.8 billion in June.
8. Oman
Oman is emerging as an increasingly important logistics alternative during the Hormuz disruption.
Q2 exports increased 40% year-on-year, supported by a more than doubling in LNG revenues, while the trade surplus reached approximately 32% of GDP.
Real estate prices increased 22.7% year-on-year, led by residential property, while Sohar Port and Freezone cargo volumes increased 52% in H1.
Oman and Saudi Arabia have also agreed a green freight corridor through the Empty Quarter, strengthening alternative regional supply routes.
Assessment: Oman is benefiting strategically from its geographic position, although tourism, subsidies and external financing remain areas to monitor.
9. Bahrain
Bahrain remains the GCC economy facing the greatest external financing pressure.
The non-oil trade deficit widened significantly in July, while non-oil exports fell sharply.
Foreign-exchange reserves increased 38% during the month to approximately $2.5 billion, but there is evidence that this may have been supported by a draw of around $1.7 billion on the UAE swap facility.
Assessment: Bahrain’s external liquidity position remains a key regional vulnerability and warrants close monitoring.
10. Wider Middle East
The economic consequences of the conflict are extending beyond the GCC.
Iraq: The budget deficit reached approximately $16 billion in H1, as disruption to oil exports significantly reduced government revenues.
Libya: The government is seeking up to $40 billion to increase oil production from approximately 1.4 million barrels per day to 2 million barrels per day.
Gaza: Diplomatic activity continues, including direct discussions involving US representatives and Hamas, but no significant breakthrough has emerged.
Lebanon: The IMF has welcomed amendments to the country’s bank resolution framework, although implementation could still face legal challenges.
Key Issues to Monitor
Over the coming weeks, the principal indicators for businesses and investors will be:
– US sanctions on Iran and the extent to which secondary sanctions affect GCC trade.
– Shipping through the Strait of Hormuz and the sustainability of alternative oil-export routes.
– Oil prices and production levels, particularly across Saudi Arabia, Iraq and Iran.
– GCC financial markets and capital flows, following July’s foreign-investor outflows.
– Infrastructure supply chains, particularly transformer availability and project financing costs.
– Saudi Vision 2030 execution and PIF borrowing, including the prioritisation of major projects.
– UAE–Iran relations following the suspension of bilateral trade.
– Bahrain’s foreign-exchange position and reliance on external financial support.
– Oman’s role as an alternative logistics and trading hub during the Hormuz disruption.
About the Author –
Justin Alexander MENA Consultants
Widely known for his deep knowledge of the region’s macro economy and political dynamics, Justin is the Director of Khalij Economics and GCC Analyst for Global Source Partners. He is a non-resident fellow at the Edward P. Djerejian Center for the Middle East at Rice University’s Baker Institute for Public Policy in Texas. Justin has been a sub-contracted expert with MENA Consultants LLC in Qatar for 5 years living and working in the Middle East as a regional macroeconomics and geopolitics expert for 25 years.
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