Beyond oil: the Gulf’s emerging growth model

At first glance, the conflict in the Middle East appears to be acting as a brake on the previously strong growth performance of Gulf economies. This impact is likely to be largely short-term, however, as the medium-term outlook remains strong, this latest geopolitical shock may also give new impetus to investment. In fact, it is likely to reinforce existing investment patterns, with Gulf states continuing to scale up both hydrocarbon capacity and non-oil sectors, while placing greater emphasis on strengthening economic and geopolitical resilience.

This includes accelerated investment in infrastructure designed to reduce future exposure to chokepoints such as the Strait of Hormuz. Alternative ports, pipelines, and overland trade corridors are gaining renewed focus, while defence spending is expected to rise, particularly on systems that protect critical assets against drone and missile threats. Investment is also being directed towards self-sufficiency, including desalination capacity, energy and LNG storage, and strategic food reserves.

According to Niels de Hoog, Senior Economist at Atradius, “The diversification strategies the Gulf states were already pursuing well before the war will now receive even greater emphasis. The conflict is likely to act as a trigger for stronger resilience, putting the restoration of confidence at the top of the agenda, with increased investment in overland infrastructure, alternative ports, and higher defence spending.”

A more balanced growth engine, anchored in capacity

What stands out is not a shift away from hydrocarbons, but the development of a more balanced growth model. Oil and gas remain strategically important, both as a source of revenue and as a stabilising force during periods of disruption. Prior to the conflict, production capacity was already being expanded, leaving the region with significant spare capacity that can be brought online quickly once conditions normalize. This commitment is exemplified by the UAE, where state-owned oil company ADNOC has announced USD 55 billion in new project awards for 2026-2028.

At the same time, the bulk of foreign direct investment flowing into the Gulf has been increasingly directed towards non-oil sectors. Finance, communications, transport, logistics, and manufacturing have attracted growing interest, particularly in the UAE and Saudi Arabia under their Vision 2031 and Vision 2030 agendas. Since the post-pandemic recovery in 2021, non-oil activity has delivered robust growth, making economic performance less sensitive to oil price volatility than in the past.

These trends have supported the emergence of a more resilient economic structure. While sectors such as tourism, trade, and logistics are currently affected by geopolitical tensions, their medium-term potential remains intact, provided confidence in the region is restored.

As De Hoog notes, “The UAE continues to stand out as the region’s most attractive investment destination, supported by earlier diversification, liberalized foreign ownership rules, and well-developed free zones. Saudi Arabia, however, has gained relative appeal as the conflict has highlighted the strategic value of its growing Red Sea presence. While scaling back overly ambitious projects already prior to the conflict in order to safeguard fiscal sustainability, projects such as Oxagon – the industrial and logistics hub of NEOM located at the Red Sea – highlight a more pragmatic shift towards realistic and economically grounded initiatives.”

Confidence as a strategic asset

Restoring confidence is now a central policy objective. This will largely depend on how the conflict evolves, particularly on a reduction in the perceived threat from Iran. Importantly, Gulf states’ limited involvement in the conflict has helped contain reputational risk and reduce the likelihood of escalation. This supports their positioning as destinations for trade, investment, tourism, and expatriate labor once tensions ease.

According to De Hoog, “Diversification programmes are resuming and, in some cases, accelerating. These efforts are essential to revive tourism and strengthen priority sectors, from electric vehicles and pharmaceuticals in Saudi Arabia to financial services, mining, transport, and logistics elsewhere. A derailment of these strategies is not expected. If anything, a short-term push to restore investment appeal is likely, especially at a time when Saudi Arabia is preparing to host several major international events over the coming decade.”

From downturn to rebound

In Atradius’ baseline scenario, which assumes a gradual reopening of the Strait of Hormuz following the ceasefire, 2026 is set to remain a challenging year. Qatar is expected to face a sharp contraction, while growth in the UAE is forecast to be close to zero. Saudi Arabia is likely to perform somewhat better, supported by its larger and more diversified economic base. From 2027 onwards, the outlook improves markedly. Taken as a whole, the GCC region is forecast to contract by 1.2% in 2026, before rebounding strongly with growth of 7.8% in 2027.

This rapid recovery is possible provided there is no lasting damage to critical infrastructure. Spare oil production capacity supports a catch-up phase, while short-term gains from higher oil prices offer additional fiscal support. As sentiment improves, foreign direct investment, primarily into non-oil sectors, is expected to recover, underpinned by solid growth prospects, a favorable business climate and improved investment regulation.

Fiscal buffers remain substantial. Low debt levels, large sovereign wealth funds and, in several cases, ongoing budget surpluses provide ample fiscal space to sustain investment even during periods of heightened uncertainty. Financial market indicators have remained contained and access to international capital markets is strong, allowing governments to maintain investment momentum. In contrast to parts of the wider MENA region where limited buffers constrain adjustment, this fiscal strength continues to support the Gulf’s position as a relative safe haven for international investors despite regional tensions.

Looking ahead, while non-oil sectors such as tourism, trade, and logistics have been hit by the current geopolitical shock, the diversification of Gulf economies is set to continue, supported by ongoing reforms and rising foreign investment.

As Niels de Hoog observes, “Capital inflows were increasingly directed towards non-oil sectors before the war, even as Gulf states continued to monetise their hydrocarbon resources. Oil and gas production had already been ramped up prior to the conflict, leaving the region with significant spare capacity that can be brought online quickly once conditions normalize. Together, diversification, spare energy capacity, and strong fiscal buffers underpin expectations of a rapid recovery once tensions ease.”

Despite the current geopolitical environment, Atradius remains committed to supporting trade in the Middle East. This commitment has been reinforced by the decision to establish operations in the Dubai International Financial Centre, reflecting a long-term presence in the region. By strengthening its on-the-ground capabilities, Atradius aims to support trade flows, accompany clients as Gulf economies continue to evolve and respond dynamically as risks and opportunities develop.

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