The escalation of violence between Israel and Iran could have heavy implications for the UAE’s economy, National Bank of Kuwait's Issa Hijazeen told EnterpriseAM. The possibility of supply disruptions, retaliatory missile strikes, and even the closure of the Strait of Hormuz has become a credible threat, with both sides vowing continued escalation.

The strikes have already driven oil prices higher, due to expectations of risk to global energy supply chains, Hijazeen notes. Higher oil prices would increase fiscal revenues and strengthen the UAE's external position. However, a prolonged conflict that disrupts air travel or threatens strategic infrastructure could undermine non-oil growth in many sectors including tourism, logistics, and finance — all of which are essential for the UAE 2031 strategy, Hijazeen added.

While Israel’s attacks have not yet disrupted oil supplies despite attacks on energy sites, Iran closing the Strait of Hormuz — a channel for some 20% of the world’s oil supply — or attacking regional oil infrastructure could cause prices to rise by a further USD 20 per barrel, former Opec official and Rystad’s head of geopolitical analysis Jorge Leon told Reuters. Meanwhile, Wall Street analysts are warning that the commodity could top USD 90 a barrel if the Israel-Iran conflict “broadens dramatically,” with Goldman Sachs analysts estimating that the conflict could temporarily knock out 1.75 mn barrels a day of Iranian supply over six months, Yahoo Finance reports.

THREE SCENARIOS-

“The degree to which the conflict escalates will determine whether the region emerges more fiscally empowered, or whether gains in diversification, trade, and investment will be overshadowed by regional instability and investor caution,” Hijazeen said.

#1- In the optimistic scenario, the conflict between Israel and Iran remains geographically contained, with Iran avoiding attacks on GCC oil infrastructure or US bases, and the Strait of Hormuz stays open under increased monitoring. Brent crude prices would stabilize in the USD 80-85 per barrel range due to supply risk premiums rather than actual production cuts.

Higher hydrocarbon prices would widen the fiscal surplus for the UAE slightly to about 4.5% of GDP. However, growth in the UAE's non-oil sector could slightly decelerate to around 4.1% in 2025, though it would remain strong, supported by ongoing reforms and significant FDI inflows.

#2- The baseline scenario according to Hijazeen will see a prolonged war with partial supply disruptions, characterized by continued Israeli targeting of Iranian military sites and limited Iranian responses against US assets or GCC infrastructure. The Strait of Hormuz will remain open, though maritime ins. costs will go up.

Oil prices are expected to rise to USD 95-100 per barrel, with increased ins. premiums and potential small-scale physical disruptions due to the loss of some Iranian crude, partially offset by spare capacity in the UAE and Saudi Arabia.

Rising defense and strategic reserve spending will pressure the UAE’s budget towards a narrower surplus. The non-oil sector — including tourism, aviation, and regional non-trade — will experience tangible slowdowns, and FDI decisions may be delayed, negatively impacting non-oil growth across the GCC, while the financial sector will likely increase provisions to counter the potential increase in non-performing loans.

#3- Finally, a pessimistic scenario of a full-scale conflict could involve Iran attempting to block the Strait of Hormuz or targeting UAE and Saudi oil infrastructure, while regional airspace would face intermittent shutdowns. This would cause Brent oil prices to surge to USD 100-120 per barrel due to expected supply losses and heightened risks to shipping routes.

While record oil revenues would be generated, they would be offset by increased emergency spending, reconstruction efforts, and subsidy increases, potentially leading to record fiscal deficits in both the UAE and Saudi Arabia, Hijazeen argued. Non-oil sectors like tourism, aviation, logistics, and real estate would contract, capital flight would increase due to heightened risk aversion, and long-term investor confidence would decline, severely disrupting trade due to the blockage of the Strait of Hormuz or attacks on shipping.

Across all scenarios, the monetary policy of the UAE and Saudi Arabia will remain tied to the US Federal Reserve's decisions, Hijazeen concludes. Central banks will have limited independent flexibility and will likely mirror any policy changes made by the Fed, as both currencies are pegged to the USD.

At this stage, it’s difficult to know: “If there is no disruption to Gulf oil then the boost in prices will help with public finances, and hence spending plans that drive non-oil growth, as well as encourage further hikes in OPEC+ production, supporting [and] boosting non-oil growth. However, risk concerns may delay investment decisions in the region and increase ins. and other costs,” GCC Economist and Khalij Economics Director Justin Alexander told EnterpriseAM. “The market may also demand higher rates of interest on debt issued in the region. If the war escalates and includes damage/disruption to shipping or on the gulf mainland then the negative impacts will be greater,” he said.

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