Iran war fiscal impact model: Kuwait and Qatar hit hardest, Bahrain may need support

Many clients have understandably asked for insights into the fiscal impact of this war. I have not seen any forecasts published so far, but this is understandable because of the many uncertainties about the duration of the conflict, the damage that will be inflicted and the ways that Gulf governments and the private sector could respond.

I have attempted to construct a very light and flexible model to provide at least some rough estimate of the impact. Here is the model in Excel for you to manipulate, and I will include a version of it in the Databank. I have graphed the results for scenarios of 2 weeks, 1 month and 2 months. This is for the phase of the war in which Hormuz is largely closed, and Iranian drones and missiles continue to rain on the GCC. At present, it seems unlikely that this phase of the war will last much longer, but there could be an ongoing lower-level conflict that permits Hormuz to reopen and normal business to resume in the GCC.

The graph below shows the change in fiscal balance for each state under the three scenarios. The baseline balances I’ve assumed are on the axis labels, so you can see that in the two-month war scenario, for example, Kuwait’s deficit is expected to be about -16.7% of GDP (the -10.3% baseline with a -6.4% impact from the war). Meanwhile, in the same scenario, the UAE would achieve a surplus of about 3.4% of GDP (4.5% baseline less -1.1% war impact).

GRAPH 1

Oman stands out because its exports are not expected to be reduced, indeed it may even boost crude production, but it benefits from the price rise. It has also suffered fewer attacks so far, because of factors including the distance of its main cities from Iran, the lack of permanent US military bases and its firm opposition to the war. It is therefore less likely to suffer damage to oil facilities.

Saudi Arabia and the UAE are able to export part of their crude and refined production via ports outside of Hormuz. However, there remains some uncertainty about what volumes they will achieve in practice—loading may be a bottleneck for Saudi Arabia, as well as piping different crude qualities. In contrast, the UAE’s backup plan to pipe about half its crude production to Fujairah may be threatened by drone attacks on that port. The model has assumed that Saudi Arabia exports 3m b/d of crude and refined products, while the UAE exports 1.8m. At these levels, the loss of output is largely offset by higher prices. The UAE also sells domestic fuel at market prices, although Saudi Arabia subsidizes it.

The volumes of the bypass oil are one of the many variables that you can adjust in the model. Others include the impact of the war on oil prices (I’ve assumed an extra $30/month while Hormuz remains closed and then an extra $3/month for the rest of the year, relative to a non-war baseline of $65) and on non-oil revenue (I assume a decline of -3% for each month of war) and spending (I assume an extra 1% spending for each month, but countries might implement austerity measures). I have also factored in the current OPEC+ tapering plans and the IMF’s pre-war forecasts for spending trends.

The most substantive fiscal impact is likely to be on Kuwait and Qatar. Kuwait has the least oil storage capacity in the region, and so will need to shut down most crude production this week (in fact, it will probably slow production to focus on the fields with the most associated gas, needed to keep the electricity going). Qatar’s LNG has limited storage and will be slower to restart after the war than crude production, due to the complex engineering requirements of supercooling, just as aluminum smelters in the region will take months to reheat if shut down (the restart times for hydrocarbons and manufacturing, which will also be affect by any damage to oil facilities, are additional variables in the model). However, both Kuwait and Qatar have vast resources to draw on from their sovereign wealth funds and other reserves. Kuwait was expected to be running a deficit of about -10% of GDP even before this war, and so the war means even more to finance either by borrowing or by deciding to draw on the Reserve Fund for Future Generations. Similar, Qatar should be able to readily borrow or draw on the Qatar Investment Authority (it has not done so in the past, but doesn’t face the same legal and customary restrictions to access its fund that Kuwait does).

Bahrain was already in a challenging situation before the war, with a structural double-digit deficit, including perennial off-budget spending, and debt of around 150% of GDP. It announced some reform measures in January (see our Jan 2 weekly), but implementation may be delayed because of the war. The impact on its fiscal balance is smaller than that of Kuwait and Qatar, mainly because hydrocarbon revenue is generally smaller in relative terms (in 2024, it was 10% of Bahrain’s GDP, vs 22% for Qatar and 38% for Kuwait). The model has assumed the same impact on non-oil revenue for all the Gulf states, for the sake of simplicity. Still, Bahrain’s non-oil economy and the revenue that comes from it are likely more fragile than, say, Kuwait, as it is driven less by government spending and more by private activity, such as tourism.

Longstanding clients will know that I have been more skeptical than the market about the potential for a third Bahrain bailout from its wealthier neighbors, and predicted the recent spate of rating downgrades. However, my argument against a bailout was partly due to a lack of efforts at fiscal reforms and reduced geopolitical concerns as a result of the region’s détente with Iran. Bahrain has now at least made some gestures towards a reform path, and the GCC-Iran détente is in ruins, meaning that longstanding concerns about Bahrain’s domestic stability, rocked in the last week by protests against the war, will come to the fore. Of course, the other Gulf states have their own concerns, and this might mitigate against swift action, but the impetus to show resolve is also clear. Crown Prince Salman made the rounds of regional capitals in February, which might have been about preparing the ground for a bailout that would have been needed even if the war hadn’t taken place.

There has been a weakening across the board in sovereign credits, and sharp moves for corporates in sectors that are most exposed, such as real estate developers. However, this has been fairly muted for most sovereigns, other than Bahrain, which has now seen its 5-year CDS spread spike to the highest since 2022. The CDS spreads peaked on Monday but have begun to ease on Tuesday. Of note, despite the expected impact of the war on their 2026 fiscal balances, Qatar and Kuwait still have very low CDS spreads. Oman and Saudi Arabia, two of the least affected, saw their CDS spreads on Tuesday fall below the pre-war level (which already included a risk premium relative to levels at the start of the year).

GRAPH 2