Gulf countries’ huge reserves explain their resilience to the huge shock

Since the effective closure of Strait of Hormuz, oil tanker traffic through this gateway has fallen sharply, creating not only a global shortage but also export halt for gulf countries. Kuwait, Qatar and Bahrain are most impacted with over 90% exposure to the Strait. Saudi Arabia and UAE are more shielded thanks to pipelines rerouting to Yanbu by the Red Sea and Fujairah by the Oman Bay.After exports are blocked, gulf countries have subsequently shut in their energy infrastructure as storage facilities are running out. Bahrain and Qatar have closed virtually all the production lines and Kuwait is also moving towards full suspension. UAE and Saudi are better positioned but not unscathed.Beyond oil, services are also deeply impacted by the conflict due to slashed flows of people. Wary about strikes, the regional air traffic remains largely disrupted, taking a heavy toll on the aviation sector especially for Qatar and UAE. The impact is spreading to tourism industries, with retail trade and food services being victims in longer run. Moreover, financial industries may face persistent pressure should the geopolitical risk remain elevated in the case of an open end of the conflict, which may factorize into the region’s risk premium and raise the funding cost in the long term.The on-and-off risk appetite has imposed bigger and more volatile shocks on gulf countries’ CDS spreads than previous conflicts, including the Israel-Hamas war in 2023. That said, the moves remain moderate compared to the major crises in history such as GFC and Covid.As such, the prolonged conflict has weakened gulf countries’ sovereign credit to the extent worse than previous conflicts but still at a manageable level. From a relative perspective, Bahrain is the shakiest among others, which is not surprising given its small sovereign wealth fund and high debt levels. However, this doesn’t necessitate a soon default as Bahrain can resort to other GCC members for emergent and concessional credit lines as it did in 2018 and 2011. Moreover, S&P had just affirmed the sovereign ratings for all GCC countries (except Oman) over the past few weeks, pointing to these countries’ resilience thanks to large reserves. However, a key assumption used by S&P is the conflict will be short-lived, i.e., end within weeks. This is in line with President Donald Trump’s announcement that the war will end in 2-3 weeks, but it is obviously not guaranteed.