The escalating conflict in the Strait of Hormuz is beginning to pose a much bigger question for Gulf economies: how long can their enormous financial reserves shield them from a prolonged disruption to one of the world's most important energy routes?
For now, countries including the UAE, Qatar and Kuwait have formidable financial defences. But analysts warn that even those buffers have limits if the crisis stretches into 2027.
Fitch Ratings has warned that “rating risks for some issuers in Gulf Cooperation Council countries could increase under a hypothetical scenario in which passage through the Strait of Hormuz remains disrupted through most of 2027”.
The agency said the “extremely large sovereign financial buffers in Kuwait, the UAE and Qatar have been a key factor in limiting the conflict’s impact on credit ratings”. But the longer the disruption continues, the more those reserves risk being drawn down to compensate for falling exports, higher shipping and insurance costs, and wider economic damage.
Firas Shaabo, professor of financial management at Istanbul’s Başakşehir University, says the immediate problem is not whether Gulf states have enough money. It is the accumulating “cost of the shock”.
Sovereign wealth funds give governments considerable room to absorb the impact, he says, but that protection is temporary rather than unlimited.
The warning comes as the confrontation at sea has sharply intensified. US Central Command announced that it had targeted three Iranian oil tankers, including one near Kharg Island, after Iran's Revolutionary Guard launched ballistic missiles towards two US warships.
The IRGC subsequently said it had targeted three tankers which, according to its account, were travelling along unauthorised routes through Hormuz, as well as three vessels linked to the United States.
The result is a rapidly deteriorating environment for shipping, insurance and trade finance - and Gulf economies are among the most exposed. Two large tankers carrying Saudi crude were attacked almost simultaneously as they left the Strait of Hormuz on 31 August.
The Saudi tanker Sadr and the Liberia-flagged Senegal Prosperity were each carrying about two million barrels of crude. Saudi Arabia's National Shipping Company, Bahri, later said two Filipino crew members aboard the Sadr had been killed.
By 2 September, the International Maritime Organization had recorded 72 confirmed incidents targeting international shipping in the region, with 21 seafarers killed.
Shipping slows to a trickle
The scale of the disruption can already be seen in vessel movements. Kpler data showed only five commercial ships passing through Hormuz last Saturday. None were recorded crossing on Sunday.
That compared with 31 vessels during the previous weekend. Traffic remained in single digits at the beginning of September, as large oil and gas carriers increasingly avoided the strait.
For Gulf exporters, that matters because Hormuz is not simply a shipping route. For several states, it is the principal outlet through which their energy exports reach international markets.
Saudi Arabia has some ability to bypass it through infrastructure connecting its oil industry to the Red Sea. Other Gulf states have far fewer alternatives.
Fitch said financial reserves would continue to provide substantial protection under a prolonged-conflict scenario, but warned that extended disruption could eventually damage the credit profiles of states without alternative export routes such as pipelines bypassing Hormuz.
The effect is being amplified by extraordinary increases in insurance costs. War-risk premiums for crude tankers have risen from about 0.25% of a vessel's value before the confrontation to between 7.5% and 12.5% in August.
For shipowners, that can make voyages commercially unattractive. Operators must either absorb enormous additional costs, pass them on through higher freight rates or avoid the region altogether.
When large reserves are not enough
The Gulf states are often portrayed as possessing almost inexhaustible financial resources because of the size of their sovereign wealth funds. But Shaabo says that can be misleading.
Those funds are not vast pools of cash that governments can immediately deploy. Their holdings range from relatively small amounts of liquid reserves, to investments that can be sold quickly but potentially at a loss during turbulent markets, and large portfolios of long-term assets that cannot easily be converted into cash.
The important question, therefore, is not simply how large a country's sovereign wealth fund is. It is how much immediately accessible liquidity it has - and how long that liquidity can sustain government spending and economic support if the disruption continues.
That distinction becomes increasingly important if the Hormuz crisis moves from a temporary shock to a persistent economic problem. A prolonged disruption could weaken growth and government revenues at the same time as states face higher spending requirements.
Eventually, Shaabo warns, that combination could begin affecting sovereign creditworthiness.
Higher oil prices offer only partial protection. They may increase the value of every barrel Gulf producers are able to export, helping compensate for some losses.
But higher prices matter much less if exporters cannot physically move the same quantities of crude. Restricted export routes mean lower volumes, while transport, insurance and import costs rise sharply.
The result could be weaker economic activity even as headline oil prices remain high.
Iran has added to that uncertainty by expanding the number of vessels on its blacklist in the strait to 56 on 2 September. The list includes oil tankers and carriers of liquefied natural gas and liquefied petroleum gas.
Iran has threatened listed vessels with fines, seizure or detention, and warned that action could also be taken against ships conducting ship-to-ship cargo transfers with them, according to Reuters.
A crisis extending beyond oil
The risks are also spreading into the financial and legal machinery underpinning international trade. The continuing turmoil has exposed weaknesses in insurance contracts used by lenders and charterers to finance shipments.
Some war-risk clauses may not have been designed for a crisis developing at the current pace. That creates uncertainty over who carries the financial risk when vessels are prevented from sailing or when routes suddenly become too dangerous.
Ship charter agreements can also limit an owner's ability to avoid areas formally designated as war-risk zones. According to Lloyd's List, the result could be prolonged contractual disputes, higher litigation costs and reduced availability of trade finance.
That means the impact of the Hormuz confrontation does not stop with oil tankers. It can gradually spread through banks, insurers, shipping companies, importers and government finances.
Three possible paths
Shaabo sees three broad scenarios. The first - and in his view currently the least likely - is a relatively rapid settlement followed by the gradual resumption of shipping.
Under that scenario, Gulf governments could rely on reserves, additional borrowing and adjustments to spending without putting their sovereign ratings under serious pressure.
The second is considerably more damaging. If disruption lasts several months, what begins as a shipping and logistics crisis could develop into a wider financial and economic problem.
Growth could slow as inflation and government spending rise. Capital could leave the region, bank profits could decline and major investments in transport, logistics, tourism and property could be delayed.
Governments would then face an increasingly difficult choice between maintaining spending and subsidies, depleting financial assets or taking on substantially more debt.
The third scenario is the most severe. Shaabo estimates a 20% to 25% probability of sustained physical damage to infrastructure including oil facilities, ports, refineries, pipelines and power stations.
At that point, the nature of the crisis changes. It would no longer simply be a question of temporarily preventing Gulf states from exporting what they produce.
Their ability to produce energy itself could be reduced. Sovereign wealth funds are far less effective against that kind of shock because the problem becomes a loss of future income rather than a temporary shortage of cash.
That could lead directly to negative reviews of sovereign credit ratings.
Not all Gulf states face the same risk
The impact would also be highly uneven. Economic expert and financial adviser Ali Ahmed Darwish says the Fitch warning should be treated with particular seriousness because the crisis highlights significant differences between Gulf economies.
Saudi Arabia has the advantage of alternative export infrastructure towards the Red Sea. For states whose geography leaves them overwhelmingly dependent on Hormuz, the options are much narrower.
Those countries may eventually have to undertake far-reaching changes to their supply and export networks. But alternative routes can be extremely expensive, technically difficult or simply impractical.
Darwish argues that governments will therefore also need to make greater use of partnerships with the private sector, particularly banks. Banks could work with insurers and reinsurers to maintain trade credit and contain the rapidly rising cost of maritime insurance.
That could reduce the pressure on governments to continually draw on sovereign funds or seek additional external financing. But there is a limit to how long these measures can compensate for a fundamental disruption to trade.
If the war and interruption to shipping continue into 2027, Darwish says Gulf states could face a genuine challenge in meeting financial obligations and preserving monetary stability.
Kareem Ramadan is a Muscat-based correspondent for The New Arab's Arabic edition, Al-Araby Al-Jadeed.
Article translated from Al-Araby Al-Jadeed, The New Arab's Arabic-language sister site. Read the full article here.