Assalamu alaikum!
Ministers, Governors, and GCC Secretary General, it is always very rewarding to join you for a discussion on the economy of the region and even more important today as you confront most directly the consequences of the war in the Middle East. Our thoughts are with all those affected by it and our prayers are for a durable peace, to secure the well-being of people and strong performance of the economy.
I would like to recognize our gracious host, Minister Al Khalifa, for hosting us in Bahrain — just as we are getting ready for our Annual Meetings, where the topic of resilience will feature prominently. In this regard, Bahrain and the rest of the Gulf region, offer valuable lessons, and our discussion here will be highly relevant for what we will talk about when, in just two weeks, the whole of our membership meets in Bangkok.
Seven months into the war in the region, the energy supply shock has been contained—in no small part thanks to your decisive response. You moved quickly to reroute critical supplies away from the Strait of Hormuz, keeping energy flowing to world markets and averting a far bigger shock to the global economy. Market forces, in the region and more broadly in the world—new supply, inventory drawdowns, and demand compression—reinforced this adjustment.
You proved that resilience is no accident—it is the dividend of reforms you have championed. Countries in the GCC region have built strong fundamentals, ample fiscal and external buffers and credible policy frameworks. The exchange rate pegs have continued to anchor stability and confidence, and banking systems have remained well-capitalized and liquid. Strategic investments in energy and logistics infrastructure have played a critical role in easing the impact of the energy supply shock. The GCC governments acted decisively to ease shipping bottlenecks, support households and firms, provide liquidity to banks, and coordinate regional logistics and trade.
Nonetheless, the negative impact of the war has been significant, reversing the region’s growth momentum. The near closure of Hormuz and now disruptions in the Red Sea have sharply curtailed oil and gas exports; damage to energy facilities has reduced production capacity; and non-hydrocarbon activity has been constrained by reduced trade, weaker business confidence, and rising prices of essential goods.
Against this backdrop, we expect the GCC economy to contract in 2026, reflecting a sharp drop in hydrocarbon production and a marked slowdown in non-hydrocarbon growth. For 2027, conditional on gradual normalization of shipping, we project a strong recovery. But uncertainty remains high and the geopolitical situation fluid. The outlook hinges on the duration, severity, and geographic scope of the conflict. More persistent or severe disruptions could delay the recovery, test investor sentiment, and make diversification and job creation harder.
In this context, focus on reforms that boost productivity will strengthen the region’s ability to withstand future shocks. The goal should be to preserve macro-financial stability and contain the impact of the conflict, while sustaining diversification and—the new imperative—building broader economic resilience and security.
First, fiscal policy should cushion the non-hydrocarbon economy against adverse demand shocks, with support calibrated to each country’s cyclical position, available fiscal space, and the impact of the shock. Any support to households and firms should be temporary, targeted, and transparent, with a clear sunset. Where weaker activity mainly reflects supply disruptions, broad stimulus could fuel inflationary and external pressures. As conditions normalize, countries should prioritize rebuilding buffers and using fiscal space for critical public investment in diversification and economic security.
Second, trade disruptions have revealed that while fiscal buffers are indispensable, they cannot substitute for physical resilience to trade shocks. For short disruptions, storage capacity and inventories of essential goods provide insurance at low cost. For longer disruptions, secure trade rerouting infrastructure, complemented by logistical readiness, becomes essential. Our analysis shows that completing the GCC Railway and the Saudi Landbridge would substantially reduce the economic losses from a closure of the Strait of Hormuz. Our estimates suggest these routes could raise GCC output even when the Strait is open.
Third, the conflict has reaffirmed the case for the region’s transformation agendas. As we have seen in Bahrain, Saudi Arabia, and the UAE, a larger non-hydrocarbon sector helped soften the blow. While substantial progress has been made on diversification, there is still more to do to close gaps with emerging market peers. Countries should sustain reform momentum regardless of oil prices. The emphasis should be on expanding the private sector’s role, improving the business climate, aligning skills with labor market needs, and leveraging digitalization and AI.
An example are digital assets, which are becoming increasingly important in the GCC. Total on-chain activity is estimated to have surged from $6 billion in 2020 to $92 billion in 2024. Clearly this brings benefits: payment efficiency, capital market innovation, and a stronger role for the GCC in global finance. But it also creates macro-financial, operational, and regulatory challenges. Finding the right balance will require robust legal, regulatory, and supervisory frameworks, along with improved data collection and monitoring, and enhanced international cooperation.
