A recession is expected in most countries this year
30 APR, 2026
Mali Chivakul, Emerging Markets Economist at J. Safra Sarasin
The war in the Middle East has already had a clear impact on the Gulf countries. The closure of the Strait of Hormuz has led to a sharp decline in crude oil exports and production, while damage to energy infrastructure has further reduced oil and gas output. In March, oil production in Kuwait was more than 50% lower than in February. The United Arab Emirates saw a drop of about 40%, while Saudi Arabia experienced a more limited decline of 23%, thanks to its ability to use the East-West pipeline and its large oil storage capacity. According to media sources, the reductions in Bahrain and Qatar were similar to those in Kuwait. Oman appears to have been the least affected country.
Beyond the closure of the strait, damage to gas production infrastructure in Qatar has also resulted in a significant reduction in gas output, which, according to Qatari authorities, will take five years to return to normal. Qatar’s PMI index in March recorded a significant decline compared to that of the UAE and Saudi Arabia. Both Qatar and Kuwait have the highest share of oil and gas in GDP. It is therefore not surprising that, according to the IMF, these two countries are expected to experience the worst recessions this year. We believe the IMF’s projections are rather optimistic, as the supply disruption has not only affected the oil and gas sector. Other sectors dependent on imports have also been hit, as cargo ships and containers have only sporadically passed through the strait. The services sector, such as tourism and airlines, is unlikely to recover quickly, leading us to be more pessimistic than the IMF regarding GDP forecasts for Saudi Arabia and the UAE.
Oman has proven to be the most resilient country thanks to its neutrality in the region. Its energy infrastructure has not suffered damage from Iran. Geographically, it also has an advantage over Bahrain, Kuwait, Qatar, and the UAE, as it has ports on the Arabian Sea. Oil production and exports from Oman have continued without interruption.
GCC countries are holding up well on the external front. Both exports and imports have declined sharply, but all countries continue to maintain stable reserves, having secured financing on private markets. The Financial Times reported that Abu Dhabi, Qatar, and Kuwait collectively raised around $10 billion through private placements of US dollar-denominated bonds. Bahrain’s external and fiscal position appears to be the weakest, but other GCC countries will likely act as lenders of last resort for Bahrain. Bahrain has in fact turned to the UAE, securing a $5.4 billion swap with the Emirates in early April.
Since the ceasefire came into effect, credit spreads have narrowed from the peaks reached in March during the escalation of the conflict. Oman’s evident resilience has been recognized by the market, as its sovereign spreads fell from 126 basis points at the height of the war to 88 basis points, a level well below February and almost in line with Saudi Arabia, despite its significantly lower credit rating (BBB- vs A+). Saudi Arabia’s spreads have returned to pre-war levels. Bahrain’s spreads have also declined from 340 basis points to 232 basis points, approaching the February average. The swap with the UAE has strengthened investor confidence that the GCC will continue to support its weakest member in the short term.
