The Iran war is undermining economic optimism across the Gulf and wider MENA. Do governments have the financial firepower to absorb the shock?
The Middle East is shuddering from its biggest crisis in decades. The US-Israeli war with Iran is shaking the entire region, testing Gulf economic resilience, and disrupting global trade and oil markets. The conflict is also creating shockwaves in Lebanon, where Israeli strikes have displaced over a quarter of the population, as well as in Iraq, Egypt, and Cyprus. Meanwhile, wars in Gaza, Sudan, and Yemen continue in the background.
Before the escalation at the end of February, Arab countries were outperforming global growth rates. Middle East and North African economies were projected to grow by 3.5% and 4%, respectively, this year, compared to 3.1% worldwide. The Gulf Cooperation Council (GCC) averaged 4.5%, led by Qatar with 6.1%, the United Arab Emirates at 5%, Saudi Arabia and Oman at 4%, Kuwait at 3.9%, and Bahrain at 3.3%.
The long-term economic impact of the conflict remains uncertain. Last month, Goldman Sachs warned that Gulf economies could slip into recession in 2026, shrinking by 2% to 5%, with Qatar and Kuwait being the most vulnerable due to their dependence on the Strait of Hormuz. Other analysts suggested that higher energy prices might partially offset these losses.
“The key variable now is the trajectory and duration of the current developments,” says Bader Al Sarraf, research analyst at Standard Chartered’s office in Dubai. “As with previous periods of geopolitical uncertainty, reactions often depend less on the initial event and more on how long the situation persists.”
“This isn’t our first crisis and it won’t be our last.”
Salah Shamma, Franklin Templeton Investments
The outcome will also depend on the extent of damage to core infrastructure and reputations. The Gulf ’s path will have widespread effects throughout the larger region, impacting energy markets, capital flows, supply chains, and expatriate workers’ remittances. This year, more than ever, no one has a crystal ball. However, some structural trends shaping MENA’s financial sector in 2026 are beginning to surface, including a greater emphasis on self-reliance, a shifting power dynamic among regional economies, and increased investment in technology.
Expect Investment In Self-Reliance
Like “lessons learned later” for GCC states, the US-Israeli conflict with Iran marks a turning point. Never before have the petrostates’ economic models faced such a stress test. Their success has relied on the simple promise that the “Khaleej” was different from the rest of the Middle East: an island of stability, immune to conflict, poverty, and even taxes. Stronger than the laws of the desert itself. A safe haven for capital, underwritten by seemingly endless oil and gas wealth.
That dream faded as Iranian missiles and drones crashed down on shiny Gulf cities. Immediate structural challenges emerged, and addressing them will be a post-conflict priority.
Food and water security remains a top priority. The Gulf imports over 80% of its food and desalinates 90% of its drinking water. Any disruption—whether from isolation, supply chain problems, or an oil spill—could cause quick and serious issues. Investments in water facilities, local farms, food factories, and water-saving technologies are anticipated.
Defense is another sector poised for growth. GCC states have long relied heavily on the US and other Western allies for protection: the modern oil-for-security pact. But alliances can change. Gulf countries already spend around 5% of GDP on the military and began building their own defense industry a few years ago, hosting some of the world’s largest arms shows and signing billion-dollar partnerships for technology and knowledge transfer. That effort is set to accelerate.
GCC states will also need to consider their reliance on migrant labor. In the UAE, Qatar, and Kuwait, foreigners make up more than three-quarters of the population, and a cloud now hangs over everyone’s head.
“What’s scaring everyone is what happens if we lose our jobs,” says an expatriate worker in Dubai, speaking on condition of anonymity. In the UAE, spreading bad publicity and rumors and contradicting government narratives are forbidden. Penalties include fines starting at $50,000, deportation, and imprisonment.
“We’re not scared for our lives,” the expatriate worker says. “The fear is not that I’m going to be hit by a missile or die in an explosion, it’s the economy. Am I going to be laid off? Can I find another job? Will my visa get cancelled? We are not prepared for this.”
The region probably will emerge from the war with renewed resolve, investing heavily to prevent it from happening again.
“This isn’t our first crisis and it won’t be our last,” says Salah Shamma, head of investment and portfolio manager at Franklin Templeton Investments. “But crises don’t just bring risk; they also create opportunity. The GCC still has deep resources, strong balance sheets, and powerful sovereign reserves. When this conflict ends, I expect a decisive policy response that accelerates and supports the region’s economic transformation.”
Lessons Learned
The Gulf region does have buffers. Banking remains a central pillar of its economies, supported by government backing, strong capitalization, and plenty of liquidity. Banks like Qatar National Bank and First Abu Dhabi ranked among the world’s 100 largest by assets last year.
However, this time, the sector is directly exposed to risk. Tehran has explicitly targeted the GCC financial sector and institutions linked to US-Israeli interests. The Dubai International Financial Centre (DIFC) has experienced several drone attacks, leading to evacuations and remote work arrangements.
Central banks have begun implementing support measures, but pressure may rise if the conflict continues. In mid-March, S&P Global estimated that Gulf banks could face domestic deposit outflows up to $307 billion. Another risk is rising non-performing loans; a 50% increase in distressed loans across the region’s 45 largest banks could eliminate more than half of their annual net income, the ratings agency states.
Even so, the sector is navigating the crisis from a position of relative strength, benefiting from lessons learned during the Covid-19 pandemic and backed by vast sovereign wealth resources that now exceed $5 trillion across the region.
“The GCC continues to benefit from strong macroeconomic fundamentals, well-capitalized banking systems, and robust regulatory frameworks,” says Al Sarraf. “Together, these factors provide an important foundation for financial systems and businesses as they navigate a period of heightened geopolitical uncertainty, supporting the continued functioning of banking activity and economic activity across the region.”
Financial markets are also becoming more structured and accessible, making it easier to direct investments in and out of the region. In the GCC, 2025 was a record year for debt capital markets, a trend expected to continue this year.
“It’s a general trend from bank-led bilateral to club deals to syndicated deals and then debt capital markets,” says Joel Van Dusen, group head of Corporate and Investment Banking at Dubai’s Mashreq Bank. “Also, because there’s so much liquidity in the GCC in general right now, we’re seeing issuers from Africa and the Far East tapping the liquidity pools in this region.”
Less Saudi, More Syria
Before the war, two major shifts were reshaping the region’s economic outlook, and once the dust settles, they are likely to continue.
First, Saudi Arabia is recalibrating its Vision 2030 plan. Some of its most highprofile megaprojects, like The Line and Neom, have been scaled back or postponed. Foreign direct investment has also fallen short of initial goals, reaching about $30 billion in 2024 compared to an original $100 billion target by 2030.
Riyadh is now refocusing. The Public Investment Fund’s (PIF) 2026-2030 strategy, unveiled in February, emphasizes AI, minerals, tourism, and domestic industrial growth. Meanwhile, the kingdom is opening new sectors to foreign investment, including real estate in Mecca, some of the most expensive in the world.
Deficits in the budget and balance of payments have led the kingdom to borrow from international markets. However, the war in Iran might have positive effects for Saudi Arabia. With export routes through the Red Sea and the port of Yanbu being less vulnerable to disruption, increased production and higher prices could help ease budget pressures.
The second major shift is Syria’s return to the regional economy. After 14 years of conflict, the removal of US sanctions has spurred a wave of investor interest, especially from the Gulf states. Qatar has committed around $7 billion to energy projects and is investing in Damascus International Airport. The UAE is supporting infrastructure initiatives, including a planned $2 billion Damascus metro system and port developments in Tartus with DP World. Saudi Arabia has pledged billions across aviation, energy, and telecommunications, with projects led by Flynas, ACWA Power, and STC under the umbrella of the PIF.
Overall, the World Bank estimates Syria’s reconstruction will cost at least $216 billion. Industry experts in Syria hope that the war in Iran won’t distract Gulf investors.
The financial sector is also growing rapidly. Arab banks, many of which have held licenses in Syria since the 2000s, are preparing to re-enter the market. Qatar’s Estithmar Holding has already acquired stakes in local lenders Shahba Bank and Syrian International Islamic Bank. Meanwhile, the easing of US sanctions is helping Syrian banks reconnect with the global financial system and rebuild correspondent banking relationships.
Technology Still A Core Trend
Over the past decade, Arab countries, especially in the GCC, have invested billions to position themselves at the forefront of fintech and innovation. More recently, the region had hoped that cheap energy and abundant capital would attract global technology giants, but Iran’s strikes on Amazon Web Services data centers in Bahrain and the UAE are causing international firms—including IBM, Microsoft, Palantir, Oracle, and Google—to reconsider their MENA exposure.
Even so, technology remains a core trend for the region’s financial sector. Gulf banks are increasingly acting like tech companies, creating their own services and hiring an exponential number of engineers and IT staff. In the UAE, for example, Mashreq Bank has built a digital studio to develop tools that boost efficiency, digitize workflows, improve customer experience, and even create AI models for revenue-generating ideas that could end-up changing the very nature of the bank.
“We’re at the point where we have built mature products that we can commercialize,” says Van Dusen. “We’re starting to sell some of these products to other GCC and African banks, and that is something we are looking to expand in the next five years.”
Digital assets and crypto payments are also gaining momentum in the region. The UAE led the way in 2022 by establishing the Virtual Assets Regulatory Authority, and several other countries are now contemplating similar frameworks.
“Governments are backing stablecoins and encouraging government-related entities to use this technology,” Van Dusen notes. “Where that takes us and how big it gets is yet to be seen, but it’s forcing the banks to pay attention.”
These shifts are creating fresh opportunities for lenders and investors. However, they are also widening the gap between high-growth GCC economies and mostly cash-based markets like Egypt, Iraq, Lebanon, Syria, and parts of North Africa, leading to a two-speed region with diverging financial trajectories.
Climate Peril
With the Iran war, energy transition is one area likely to take a back seat; ironically, since environmental damage from the war can only make it more urgent.
For several years now, the MENA region has been shaping its own voice on climate change, promoting an energy transition while clearly stating it will not turn its back on fossil fuels. ESG initiatives increased after the 2023 Dubai COP28, as regional lenders decided to lower their carbon footprint and promote green and blue investment mechanisms.
But in the last two years, global momentum has slowed, and energy priorities have shifted in many parts of the world. With another war ongoing in the Middle East, defense is likely to dominate the agenda and climate action might fall further down the list of priorities.
Yet, the ongoing conflict already has a significant environmental toll. Shelling oil and gas facilities causes an ecological disaster, with dangers from oil spills, water pollution, toxic smoke, and black rain. The war’s carbon footprint is also considerable, highlighting how regional security crises can impact areas well beyond their immediate geopolitical or economic effects.
