The six member states of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – are grappling with severe economic turbulence spurred by the ongoing US-Israeli war on Iran, a conflict that has upended long-standing investment strategies across the region. The escalation of hostilities has injected unprecedented uncertainty into critical maritime trade chokepoints, including the Strait of Hormuz and Bab al-Mandeb, triggering a sharp collapse in cross-border capital flows. Data shows foreign direct investment into the GCC has plummeted by as much as 67 percent since the war commenced in February, eroding a core pillar of regional economic growth.
Beyond the drop in inbound capital, the long-standing capacity of GCC states to deploy large volumes of outbound investment – a tool that has shaped their global financial and political influence over the past 40 years – has come under intense strain. This fiscal pressure has forced widespread strategic recalibration across both cross-border investment portfolios and domestic budget allocations, forcing governments to scale back previously ambitious development targets, most notably in Saudi Arabia.
Justin Alexander, an economist focused on GCC economic dynamics, told Middle East Eye that the conflict has triggered immediate downward pressure on government fiscal revenues. As a result, he explains, some regional governments are no longer able to allocate new capital to their sovereign wealth funds, and a growing number are even drawing down existing SWF assets to cover ongoing public spending obligations.
Kuwait became the first major state to take this step this week, announcing it would borrow from its $1 trillion-plus Future Generations Fund, the country’s primary sovereign wealth vehicle, to close widening gaps in its public budget. Meanwhile, Bloomberg reported earlier this week that Saudi Arabia is actively pursuing up to $8 billion in new loans through its central debt management office, as part of efforts to expand non-oil revenue streams and cover budget shortfalls.
At the core of the growing fiscal squeeze is the near-total disruption of GCC oil and natural gas exports stemming from the closure of the Strait of Hormuz, forcing governments to reallocate billions of dollars to emergency domestic infrastructure projects designed to bypass the chokepoint. The most high-profile of these projects is a second oil pipeline the UAE has commenced construction to connect its inland oil fields to the port of Fujairah on the Arabian Sea, which would allow exports to bypass the Strait of Hormuz entirely.
Ben Cahill, a senior fellow at the Washington-based Atlantic Council think tank, notes that these large-scale infrastructure projects have historically been driven more by geopolitical priorities than pure economic efficiency, with collective price tags expected to run into the tens of billions of dollars. “These pipelines are expensive and geopolitically complicated, but the Gulf states will spend serious money for back-up options,” Cahill explained.
Securing capital for these urgent domestic projects has become far more challenging amid a 30 percent drop in hydrocarbon export revenues across the bloc, the same fiscal pressure that pushed Kuwait and Saudi Arabia to pursue emergency borrowing this week. Experts note that while Saudi Arabia has regularly taken on debt to fund its large-scale megaprojects in recent years, the current urgency of its borrowing is atypical. For Kuwait, the move to draw down its flagship sovereign wealth fund is nearly unprecedented: the only other time the country pursued such a step was in 1990, immediately after Iraq’s invasion that devastated the country’s economy.
Alexander projects that the ongoing shift from outbound global investment to urgent domestic spending will persist for the foreseeable future. “The demand for domestic spending for recovery and in new infrastructure will compete to some extent with foreign investment priorities,” he said.
Not all GCC member states are facing identical pressures or adopting identical responses, according to Robert Mogielnicki, a leading independent researcher and consultant focused on Gulf political economy. While Saudi Arabia has simply accelerated the strategic budget shifts it already had underway before the outbreak of the war, Mogielnicki notes the UAE has prioritized efforts to restore pre-war economic normalcy, while Qatar is still working to manage growing fiscal strains driven by its extensive exposure to trade routes through the Strait of Hormuz.
For years, GCC economies have systematically pursued economic diversification strategies designed to reduce their reliance on volatile hydrocarbon exports, investing heavily in emerging sectors from logistics and tourism to competitive e-sports. Alexander notes that this pre-conflict diversification has provided a critical buffer for regional economies amid the current downturn. While the war has disrupted almost all sectors, broader, more diversified domestic economic bases have softened the blow of collapsing hydrocarbon production.
That said, many of the sectors that were at the core of GCC diversification strategies have also been hit hard by the conflict. Regional tourism arrivals have dropped sharply, delivering record losses to domestic airline and hospitality industries, while returns on foreign tourism investments held by states like Qatar have not been enough to offset lost hydrocarbon export revenues. Other key sectors targeted for diversification, including heavy manufacturing, have also faced major disruptions from the Hormuz closure, with some aluminium processing facilities and digital data centres sustaining direct damage from cross-border strikes, Alexander added.
While economic diversification remains a core long-term policy objective for all GCC states, the war has pushed many planned diversification initiatives down the list of immediate priorities, Mogielnicki explained. He cites the example of the new UAE Fujairah pipeline, a project that was originally framed as a long-term diversification asset but is now primarily a tool to mitigate immediate Hormuz-related export disruptions. These emergency infrastructure projects pull capital away from diversification for growth, creating long-term tradeoffs: “clearly, lots of excess infrastructure is not the most cost-efficient approach to economic diversification,” Mogielnicki said.
Outbound foreign investment has long served as a deliberate tool of soft power for GCC states, delivering geopolitical leverage, cultural influence, and structural economic power across the globe. That dual function of investment – delivering both commercial returns and geopolitical influence – remains central to the region’s recalibrated strategies, Alexander says. “Gulf investments often have dual objectives of commercial returns and cementing bilateral relationships.”
Despite the widespread shift to domestic priorities, GCC investors have still closed a number of record-breaking large-scale outbound deals in recent months, though most of these deals had been negotiated and had momentum before the war began. In early August, a Saudi-led consortium completed the $55 billion leveraged buyout of American video game developer Electronic Arts, the studio behind global hit franchises *FIFA* and *The Sims*, marking the largest private buyout of a technology company in corporate history.
Even more recently, on August 24, the governments of France and Saudi Arabia announced a joint partnership to build three new theme parks just outside of Paris, including one attraction themed around the global manga franchise Dragon Ball Z. The project is backed by a $7 billion investment from Saudi Arabia’s state-affiliated Qiddiya Investment Company, and was formally announced by French President Emmanuel Macron during an official visit by Crown Prince Mohammed bin Salman – a high-profile public display of how Gulf states continue to use outbound investments to advance their geopolitical standing on the global stage.
Kristian Alexander, a Gulf security analyst at the Middle East Institute, explains that these high-profile outbound investments are designed to deliver both financial returns and expanded cultural influence for Saudi Arabia. “The EA acquisition provides access to global franchises and digital audiences, while the Paris project potentially gives Saudi-owned Qiddiya an international operating platform and European visibility,” he said.
These large outbound deals come as Saudi Arabia faces major setbacks to its domestic megaproject agenda, most recently announcing a full halt to construction on The Line, the 170-kilometer flagship smart city project at the core of the kingdom’s $1 trillion Neom development initiative, with construction not expected to resume until at least 2030. The project has already undergone extensive restructuring after projections showed original costs could balloon by as much as 800 percent, and shrinking oil revenues and logistical challenges have forced the kingdom to pivot its domestic focus to AI data centers and digital infrastructure instead. Even the large-scale domestic investments that once defined the Gulf’s economic boom are now feeling the war’s fallout, forcing rapid reprioritization across government budgets.
For Qatar, global soft power influence continues to be anchored in strategic investments in the international luxury tourism sector, a low-friction path to expanding geopolitical influence that avoids the political scrutiny that comes with investments in sensitive sectors like defense or energy. Over the past three decades, Qatar has accumulated a sprawling portfolio of luxury hospitality acquisitions across major global hubs including New York, London, Paris, Barcelona, Singapore, Rome, and Zurich, giving the small emirate a strategic foothold at the intersection of global luxury and finance. “A tourism project is easier to present as employment, environmental tourism and economic development,” Kristian Alexander explains, making these investments far less politically controversial than alternative forms of influence-building.
The most recent example of this strategy is a new ultra-luxury resort project on Seychelles’ Assomption Island, where a Qatari-led consortium acquired development rights for the high-end property. The site is located adjacent to the Aldabra Atoll, a UNESCO World Heritage Site, and the project has already drawn fierce criticism from global environmental groups concerned about the ecological damage of construction in the sensitive protected ecosystem.
More significantly, Assomption Island was previously selected by the Indian military for development as a new naval outpost, part of New Delhi’s “necklace of diamonds” strategy to counter China’s growing “string of pearls” military and economic presence across the Indian Ocean. The Qatari luxury hotel investment allows Doha to establish a permanent economic and political foothold in this strategically critical region, at a time when Gulf states are increasingly competing with China and India for influence across the Indian Ocean littoral. This project perfectly embodies Qatar’s “luxury diplomacy” model, Kristian Alexander says: “Qatar can consequently obtain presence, relationships and reputational visibility in a strategically important location without requesting the explicit sovereign privileges associated with a military base.”
Looking ahead, GCC states recognize that they will need to continue investing abroad to sustain the economic and political influence built up through decades of cross-border dealmaking, particularly as the region takes on an increasingly central diplomatic role in global negotiations over the future of the Strait of Hormuz. But sustaining that outbound investment will become far more challenging in the coming months, as the closure of Hormuz and the war’s broader fiscal toll squeeze government budgets at the worst possible moment. Persistent uncertainty over when hydrocarbon exports will return to pre-war levels adds to the pressure, as urgent domestic infrastructure spending consumes available capital, leaving GCC economies increasingly financially stretched.