The Gulf economies are in BIG trouble

0:00 Iraq, Kuwait, Bahrain, Qatar, the United Arab Emirates and Saudi Arabia.

0:07 They are literally built their entire economies

0:11 on oil and then to diversify to the risk,

0:14 if you will, they build some of the biggest airliners in the world.

0:19 And they became a so-called safe haven in the Middle East.

0:22 But now this war and specifically the blockade of Hormuz

0:28 are threatening all of it at the same time.

0:32 And honestly, I don't think people realize yet how

0:36 unfathomably big this crisis is for the Gulf economies.

0:40 For example, take Qatar.

0:42 Its economy depends on oil, and especially natural gas for roughly 42%.

0:51 And almost all of that has to go through the Strait of Hormuz to de-risk.

0:57 Though Qatar became an international air travel hub,

1:01 which means now aviation accounts for a little

1:05 over 10% of its economy and tourism.

1:11 For another, roughly 10% of GDP seemed very smart just a few months ago.

1:18 But now, with both its airspace and the strait close,

1:23 it means that at least 62% of Qatar's

1:28 entire economy is in a state of total paralysis.

1:33 But just for context, Ukraine's economy contracted by roughly 30% in 2022.

1:38 The US economy contracted for 29% during

1:41 the Great Depression over the course of four years.

1:45 But of course, Qatar is not Ukraine.

1:47 It is one of the wealthiest countries in the world.

1:50 So a month long shutdown was manageable.

1:53 So if the war ends in a month.

1:56 A Goldman Sachs economist has estimated that Qatar's

1:59 economy will only contract by 14% in 2026.

2:06 Still, that is a substantially bigger recession than happened during Covid.

2:11 But of course, like after Covid, Qatar will bounce back from this.

2:16 No problem.

2:18 However, the thing is, this conflict,

2:20 it doesn't look like it's getting any better.

2:22 In fact, I've read some pretty alarming reports that Gulf states like

2:26 Qatar depend for 99% of their drinking water on these six desalination plants,

2:36 which have in Bahrain already been targeted in the war.

2:40 This means that in a true disaster scenario,

2:43 the entire country may need to be evacuated.

2:47 So that raises the question are Gulf economies facing a total collapse?

2:52 Iran has said it wants U.S.

2:54 troops out of the Middle East.

2:56 Could it soon forced Gulf economies to eject U.S.

2:59 troops simply by choking their economies?

3:03 Hey, I'm Yuri, I'm a pizza in economics,

3:05 and I've spent the last days analyzing all of the Gulf

3:08 economies and how bad they will be affected by three potential scenarios.

3:14 Scenario number one, a quick end to the war,

3:17 either because the US wins are because Iran forces them to push out US troops,

3:23 the Gulf countries, that is.

3:24 Then there's scenario number two, a long a war,

3:27 in which case I've calculated how long the various Gulf

3:31 economies can survive without export revenue through the Strait of Hormuz.

3:35 And finally, scenario number three,

3:38 a disaster scenario in which either the Gulf economies run out

3:43 of water or population given that some rely for almost 90% on immigrants.

3:50 So let's get into it with scenario number one.

3:54 A short war, which is exactly what we have been seeing so far.

3:58 To understand the damage done so far,

4:00 we have to look at the two biggest disruptions done to the Gulf countries,

4:06 which is exactly what we have seen so far a short disruption.

4:11 But to understand the damage that has already been done,

4:14 we have to look at the two biggest

4:17 disruptions that to go of countries have faced.

4:20 First, there's the stencil of industries that depend

4:22 on the Strait of Hormuz for exports, such as oil and gas and also manufacturing,

4:29 plus the effective standstill of air travel and tourism, oil and gas.

4:33 So far, Bahrain is the least dependent on it,

4:37 with it accounting for roughly 26% of its economy.

4:43 Actually, its main diversification strategy has been manufacturing,

4:47 which now accounts for roughly 15% of its economy.

4:53 But sadly, that is also mostly for exporting

5:00 Bahrain is also a major tourist destination these days,

5:02 but that is mostly for local tourists, so that seems to be fine so far.

5:07 So all in all, I'd say that roughly 41% of its economy is paralyzed right now.

5:15 Compare that to Kuwait, which depends for 35% on oil and gas,

5:20 while trade, tourism and manufacturing is relatively small.

5:24 So I'd say that roughly 38% of its

5:28 economy is paralyzed and its northern neighbor, Iraq, it depends for about 55%.

5:34 That's quite a lot on oil and gas for its GDP.

5:38 And almost all of that was exported through her moose.

5:41 But now Iraq has just reopened its pipeline to Turkey,

5:49 and that will help it divert about 20% of its oil at this very important,

5:54 roughly double the price as before.

5:57 So for them, I'd say that roughly 33% of their economy is paralyzed,

6:06 much less than Qatar, which we've already discussed to be at 62%.

6:12 And now moving on to the big boy in the region, Saudi Arabia.

6:16 It depends for roughly 34% on oil and gas

6:20 and 33% on manufacturing and 8% on aviation.

6:26 And 5% on tourism.

6:28 However, calculating how much of Saudi Arabia's economy

6:30 is paralyzed is very difficult for two reasons.

6:34 First, much of their airspace,

6:36 tourist areas and many of their ports are actually open.

6:40 Second, they have a hugely important pipeline which allows

6:45 them to export about 60 to 70% of their oil.

6:48 But this is more crucial than they think.

6:51 Again, because they are currently selling that oil at almost

6:55 double the price than they were before the war.

6:58 Finally, there's the UAE, which depends for roughly 24% on oil and gas.

7:04 But like Saudi Arabia,

7:06 it has a pipeline that has been estimated to help itself 43% of its oil.

7:13 And again, because the prices are roughly

7:15 double than that they were before the war,

7:17 it means that they roughly have the same revenue from oil as they had before.

7:22 But much like Bahrain and Saudi Arabia, they have major manufacturing sector,

7:27 and they also have a lot of mining, unlike these economies.

7:30 And a lot of this is actually exposed to their biggest port being closed.

7:36 That's right over here.

7:37 That being said, the UAE and especially of course

7:40 Dubai relies heavily on aviation 18% and tourism 11%,

7:47 which have both mostly been paralyzed.

7:51 So for these two countries is really anyone's guess.

7:54 But let's say just for the sake of argument,

7:57 that the UAE has 20% of its economy being paralyzed and Saudi Arabia ten.

8:05 Of course, it's more in reality,

8:06 but both of them are really profiting now from much higher oil prices.

8:10 But of course, stuff doesn't just go out through the Strait of Hormuz.

8:15 In fact, the Gulf economies also used the Strait of Hormuz

8:19 for about 70% of their crucial food and medicine imports.

8:27 However, after the main imports,

8:31 ports such as and I hope I'm going to pronounce this correctly,

8:35 Qasr in Iraq or the port in the city of Kuwait,

8:41 or the port south of Doha, and especially, most importantly,

8:46 the port in Dubai known as Jebel Ali, are essentially now shut down.

8:53 Now they have to rely for these imports

8:56 on land routes via Jordan and via Saudi Arabia,

9:04 and finally, of course, via the ports of Fujairah in the UAE.

9:11 Meanwhile, Qatar has largely started importing via air,

9:15 which is much more expensive,

9:17 and the result of all of this, these imports has been long

9:21 traffic jams at ports not made for such high volumes of goods,

9:25 and therefore a big spike in the cost of food and medicine imports.

9:29 But crucially, because many Gulf governments

9:31 have prohibited supermarkets from price gouging,

9:35 and because many of them have large food reserves,

9:38 so far the damage from this has been limited and consumer prices

9:43 have not gone up by as much as you would have expected.

9:47 So these are, I think, the main pain points for the Gulf countries so far.

9:53 All of them are facing far higher import costs for food and medicine,

10:00 and a chaotic reshuffling of trade routes.

10:05 Qatar and Kuwait.

10:07 So Qatar and Kuwait have been hit the hardest so far,

10:12 while Saudi Arabia and to a lesser extent

10:16 the UAE have been doing fairly okay so far due

10:19 to them getting a much higher price for the oil

10:23 that is still being exported through their pipelines.

10:27 And therefore, I think it makes sense that Goldman Sachs economist Farouk

10:31 Snoozer muddled in early March that if the war ends late April,

10:36 so fairly soon, the 2026 economies of Qatar

10:40 and Kuwait will contract both by roughly minus 14%.

10:49 On the other hand, the UAE would only shrink

10:52 by minus 5% in 2026 and Saudi Arabia by minus 3%.

11:00 Given what we've seen,

11:02 I think Bahrain and Iraq will then land somewhere in between these numbers.

11:08 Now, all of that is very substantial.

11:10 It is a bigger hit than during Covid.

11:13 But honestly, me as well as most analysts think

11:16 that this will be manageable given how rich these countries are.

11:19 However, will the war actually end late April?

11:23 That assumption is looking increasingly unlikely,

11:25 and this brings us to scenario number two a long war.

11:31 So what happens to the Gulf countries if the war last much longer?

11:35 Can Iran break their economies?

11:37 Historically, if we want to know whether

11:39 or not a war economy will actually break.

11:42 What matters is not GDP.

11:43 What matters is whether or not a country can earn

11:46 enough international currency to finance its war efforts and more importantly,

11:50 in this case, feed its population.

11:53 Now, given that the Gulf countries are

11:56 highly reliant on crucial food and medicine imports,

11:59 plus the fact that they may need to import a lot

12:03 of missiles and other defense systems in a long war.

12:06 I think it's safe to assume for a worst case scenario,

12:09 that they need to keep importing just as many goods as before.

12:14 So fewer luxury goods, but more essential goods.

12:17 But while Qatar, Bahrain and Kuwait's economies may depend on the Strait

12:24 of Hormuz for less than or about half their GDP,

12:29 their export revenues depend on it.

12:31 For a whopping 95%.

12:36 On the other hand, Iraq's northern pipeline now means that it

12:39 has about an exposure of 80% when it comes to export revenues.

12:45 Meanwhile, again, Saudi Arabia and the UAE are difficult to estimate,

12:48 but thanks to their pipelines and the increased price of oil,

12:52 especially if there is a long war,

12:55 for simplicity, I will assume that the Saudis only take a 20%

13:01 hit and the UAE takes a 30% hit to their export to revenues.

13:11 But I feel a lot, honestly, that would cause an immediate currency collapse

13:15 for 90% of economies around the world,

13:18 especially if they lose 95% of their export revenue.

13:22 But as you can see here, the Gulf currencies look surprisingly stable.

13:27 For example, the Saudi Riyadh is nice and tied to the U.S.

13:32 dollar.

13:32 The Kuwaiti dinar is very stable

13:36 and the Emirati dirham is also extremely stable.

13:42 It may not look very stable like

13:44 this, but if you look at these numbers over here,

13:47 it's just tiny, tiny, tiny movements.

13:50 These currencies are absolutely fine.

13:53 So why is that the case?

13:54 Well, it's because they are extremely wealthy.

13:58 Everybody knows that.

13:59 But how wealthy?

14:01 Let's go back to our map.

14:03 Let's go from north to south.

14:05 Iraq has the smallest, a wealth fund estimated at roughly $6 billion worth.

14:14 It's tiny, but a central bank.

14:16 A war chest is actually pretty full at roughly 800 billion USD.

14:26 Next, let's go to their small southern neighbor, Kuwait.

14:30 Their wealth fund is absolutely massive, with $1 trillion in assets.

14:40 However, its central bank only has half of what Iraq has at 54 billion.

14:47 Meanwhile, Qatar has about $550 billion in its wealth

14:55 fund and about 72 on top of that in reserves.

15:00 Now, compared to that, Bahrain looks very poor indeed,

15:04 with only 17 billion in its wealth fund

15:07 and just 4 billion in central bank reserves.

15:11 Saudi Arabia, the giant, is surprisingly not the richest country.

15:16 It's famous wealth funds.

15:18 The piss has an estimated 1 trillion, so still way, way more than Bahrain.

15:26 In its assets.

15:28 And then the central bank has about 500 billion in reserves.

15:34 And next the UAE is surprisingly richer.

15:38 It has about 2 trillion in all of its wealth funds combined,

15:43 and then about 227 billion in the central bank reserves.

15:50 But of course, me drawing these numbers on the screen by themselves,

15:54 they are meaningless, right?

15:55 Just big numbers.

15:56 Bahrain may look poorer,

15:58 but it also has a much smaller population than, for example, Saudi Arabia.

16:02 So it doesn't need to import as much.

16:04 So what we need to do now is to put all of that together

16:08 and calculate how many years each Gulf country

16:10 can keep importing stuff while exporting way less,

16:13 and in some cases, almost nothing.

16:16 And this simple exercise will actually reveal

16:18 why Gulf currencies look as stable as ever.

16:21 That is, even if we assume, conservatively, that only 40% of their oil funds can

16:27 be sold fairly easily without absolutely crashing global markets.

16:32 We will find that Saudi Arabia can survive actually forever,

16:37 thanks to its pipeline.

16:41 Hyper exposed Kuwait also quite surprisingly so 95% less export revenue.

16:46 It can still survive a whopping ten years based on its massive wealth fund,

16:52 which is almost as big as that of Saudi Arabia, which is of course, much bigger.

16:56 Qatar also very wealthy.

16:57 No more exports almost can survive for almost

17:02 eight years just based on its massive wealth.

17:06 Similarly, the UAE can hold out for about seven and a half years despite

17:12 the destruction of Dubai's entire business model

17:15 thanks to its wealth and, of course, its pipeline and alternative harbors.

17:20 Over here.

17:21 Iraq can hold out almost for two years,

17:26 mostly thanks to now its pipeline to Turkey and its big central bank of artists.

17:32 And it's only really Bahrain that looks very vulnerable,

17:36 being able to survive only for a seven months due

17:40 to its reliance on Hormuz and relatively small wealth funds.

17:44 But honestly, Bahrain is so small that Saudi

17:47 Arabia could simply bail it out if need it.

17:51 Unless, of course, you can goes truly scorched earth on the Gulf,

17:56 bringing us to scenario number three a disastrous war.

18:01 Total war in this scenario,

18:03 Iran tries to break Gulf economies export capacities by bombing their pipelines,

18:09 which is, of course possible.

18:13 And on top of that, they could really

18:16 bomb the alternative ports that the UAE has, which are fairly close to Iran.

18:21 Now, in that case, the UAE may become just as blocked as Qatar,

18:26 but because it is less wealthy per person,

18:29 it would now be able to survive for a little under two years.

18:36 On the other hand, thanks to its red seaports all across the coast over there,

18:41 Saudi Arabia, even if it no longer has its pipeline,

18:44 it would still have some export capacity left 20%,

18:47 roughly allowing it to hold out for about five

18:52 and a half years purely on their massive wealth.

18:57 That is still quite a long time.

19:00 So okay, now Iran again escalates bombing major population centers.

19:05 This exposes yet another big weakness in the Gulf economies,

19:09 namely their massive, massive reliance on immigrants.

19:14 Specifically, the UAE consists of about 88% immigrants.

19:20 The Da also 88% immigrants.

19:24 Roughly Kuwait's 70% immigrants.

19:28 Still, Bahrain 50 3 a.m.

19:31 running out of space to draw on.

19:33 But you get the point.

19:34 And Saudi Arabia way less 41% immigrants.

19:39 Iraq.

19:41 It does have immigrants,

19:42 but these are mostly Syrian refugees which are less affected by this crisis.

19:47 So yeah, if the war escalates, a lot of these could be leaving,

19:52 going back home, often to South Asia crashing or Britain crashing.

19:59 The Gulf economies.

20:00 However, from a pure war economy perspective,

20:02 the upside would then be that the Gulf economies would need a lot fewer imports,

20:09 meaning that they could hold out quite a bit longer.

20:11 So if the war truly escalates, it may not be in Iran's best interest to actually

20:17 bomb all of these population centers and send the immigrants home.

20:20 Honestly, the only real existential weakness that I

20:24 see right now are the water desalination plants, especially Qatar, Bahrain,

20:29 Kuwait and the UAE rely on more than half

20:35 roughly for their entire water supply on the Asian plants,

20:38 which is this red bar.

20:40 So these are sitting ducks.

20:44 And for drinking water, it's even worse.

20:47 99% of Qatar's drinking water comes from these plants, 90% in Bahrain.

20:53 And while in Saudi Arabia it is way less.

20:55 I'm still betting that you will see

20:57 a humanitarian disaster if Iran destroys them all.

21:01 Entire cities would have to be evacuated.

21:04 It would be terrible.

21:05 Yet again, this could then also mean that the immigrants

21:08 go home while the native population are evacuated.

21:11 Yet then again, this could also mean that the immigrants will go

21:16 home while the native population will

21:19 be evacuated to further inland Saudi Arabia.

21:24 From there, they could regroup.

21:26 And because their central bank wealth and wealth funds will be unaffected.

21:30 After all, these are global.

21:32 On top of that, the foundation of their economy is their massive oil wealth.

21:38 It will all still be there on the ground.

21:42 A lot of that infrastructure then there will be lost.

21:45 Of course, now could be rebuilt once the Iranian regime is out.

21:49 So honestly, even in a complete disaster scenario,

21:53 the Gulf countries look more resilient than I initially thought.

21:58 So in conclusion, yes, the Gulf economies are exceptionally exposed.

22:04 If this war continues,

22:05 we could see an economic destruction on a truly gigantic scale.

22:10 All the economic diversification efforts of Dubai, Qatar, Bahrain,

22:15 all what they've worked for for years,

22:17 even decades, it is now truly all at risk.

22:20 And given their dependance on desalination plants for water,

22:23 we could even see a major humanitarian disaster if the war escalates.

22:28 However, honestly, in a true all out war scenario,

22:31 the Gulf economies are less likely to collapse than I thought.

22:35 When I first started my analysis and found out

22:37 how much they depended on the Strait of Hormuz.

22:40 It's like if you hear that your friend just lost his job and half his wealth.

22:45 Of course, your first reaction might be that you think that he is

22:49 ruined until you find out he still has half of his Ferrari collection left.

22:54 I think that analogy kind of sums it up for me.

22:58 Those are the Gulf states.

22:59 That being said, these guys have worked for years

23:02 and years to become a global safe haven,

23:05 and that status is now truly under threat.

23:08 Dubai's entire business model looks very shaky indeed.

23:12 And what will happen to Saudi

23:15 Arabia's ultra expensive megaprojects like the line?

23:19 Even in our optimistic scenario,

23:20 the Gulf states are still facing a major recession,

23:23 and it may take years for them to recover.

23:26 But perhaps even worse, if they are forced to start selling their wealth.

23:34 And if many poor South Asian immigrants are forced

23:38 to leave the Gulf states and go back home, who is really in trouble?

23:45 That's right.

23:45 Poor and indebted countries like Egypt, Jordan, Pakistan and Bangladesh.

23:55 But I have to do a follow up analysis on that soon.

23:59 So let me know if you want to see that.

24:00 Finally, there is, of course, Iran itself,

24:02 which has many of the same vulnerabilities that the Gulf has

24:07 its oil also has to go through the Strait of Hormuz,

24:11 and it's all concentrated on a single island.

24:14 And it also relies a lot on water desalination plants all across its ghosts.

24:22 And very crucially, it does not have

24:24 the same financial buffers that the Gulf countries do.

24:28 So to get a better sense of that, I highly recommend

24:30 you check out the excellent analysis by our advertising sponsor, The Economist.

24:34 Specifically, I urge you to read this analysis on how Iran is still

24:39 making lots of money from its oil exports through the Strait of Hormuz.

24:43 And on this analysis on how not just the US.

24:46 Also, Iran still risks overplaying its hand by dragging the war out longer.

24:51 And then to better understand the ultimate doom scenario,

24:54 I recommend you read their take on why,

24:57 in the current Gulf War, water may prove as decisive as oil,

25:01 which goes into why Iran is vulnerable as well as these article show,

25:06 The Economist delivers insights to let you

25:09 see the bigger picture and think for yourself.

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