Strong foreign reserves and new export routes help GCC economies weather the US-Iran conflict.
This article appears in the November issue of Global Finance Magazine.
For Iran’s neighbors in the Persian Gulf, proximity to the Islamic Republic has long meant geopolitical uncertainty.
Those concerns intensified in late February after U.S. and Israeli attacks on Iran triggered a conflict that effectively closed the Strait of Hormuz to normal commercial shipping. The strait normally carries about a fifth of global oil consumption.
The disruption threatened a major revenue source for Gulf states, raising concerns about pressure on their foreign exchange reserves.The disruption threatened a major source of revenue for Gulf states, raising concerns about pressure on their foreign exchange reserves.
Thus far, however, the region has demonstrated greater financial resilience than many thought possible.
The six Gulf Cooperation Council states entered the conflict with substantial foreign exchange reserves, which provided a buffer against lost oil revenues and higher costs.
“Foreign reserves have been more resilient than initially feared,” said Said Bakr, a research associate in political economy at the Arab Gulf States Institute. The region entered the conflict with substantial financial buffers, while rising crude prices have offset a decline in export volumes.
Finding New Routes
Iran’s disruption of the Strait of Hormuz and attacks by Yemen’s Houthi rebels near the Bab el-Mandeb Strait have forced Gulf oil exporters to seek alternative routes to international markets. Saudi Arabia continues to reroute crude through its East-West Pipeline to the Red Sea port of Yanbu after a temporary shutdown caused by a September drone attack. The UAE has relied on its Habshan-Fujairah pipeline, which carries oil to the Gulf of Oman, bypassing the Strait of Hormuz. Shipping has also been rerouted to Africa, where ports in countries like South Africa along the coast have benefited greatly.
The continued export of crude, albeit at lower volumes, coupled with prices rising from an average of $66 per barrel in January to over $100 in September, has been instrumental in sustaining Gulf-state revenues. Earnings from non-oil sectors are also booming as the Gulf Cooperation Council states diversify their economies.
All this has combined to keep their FX reserves resilient. Saudi Arabia’s reserves have increased to 1.82 trillion Saudi riyals ($485.3 billion) in August from 1.78 trillion riyals ($474.6 billion) in January. The UAE reserves have remained relatively stable, ending the second quarter at 931.4 billion dirhams ($253.6 billion).
“The war and the Strait closure will impact the flow and direction of reserves but will not structurally dent the comparative advantage of the Gulf states,” said Bader Al-Saif, assistant professor at Kuwait University and associate fellow at Chatham House. Thus far, stable reserves have helped them maintain currency stability, meet trade obligations, and avoid disruptive measures like sharp spending cuts. Large sovereign wealth assets have provided additional buffers.
However, not all Gulf states have maintained positive flows. In Bahrain, servicing high government debt and a widening budget deficit pushed reserves down to $3.9 billion in June, down from $7.1 billion in February.
John Nijraini is a contributing writer based in Kenya.