The Decisive | Season 7 | Ep.1 - Beyond Disruption: The Next Chapter for GCC Economies

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Kristen Hallam

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making. Welcome to The Decisive. I'm your host, Kristen Hallam. Today we're bringing you highlights from a July 15th webinar, Beyond Disruption: The Next Chapter for GCC Trade, Investment, and Growth. The discussion features S&P Global Market Intelligence experts Kevyn Lim, Principal Research Analyst for Middle East and North Africa Country Risk; Chris Rogers, Head of Supply Chain Research; and Jamil Nayyem, Associate Director for Middle East and North Africa Economic Forecasting. In a discussion led by Ralf Wiegert, who leads the Middle East and North Africa Economic Forecasting team, they examine how Gulf trade routes may evolve beyond temporary disruption, where competition for market share could intensify as trade flows shift, how resilience priorities may reshape policy and investment plans, and what these changes could mean for growth, fiscal outlooks, credit risks, and emerging opportunities across the region. Let's listen now.

Ralf Wiegert

Chris, what have you seen in terms of trade flows so far? Have global buyers been able to find alternative sources?

Chris Rogers

Yeah, thanks, Ralf. So I would say when we look at the data itself, the reminder that we get is how slowly maritime supply chains actually move. So typically shipping goods from the Middle East to the key manufacturing centers in Asia can take between 4 and 6 weeks. So even when the strait closed, goods have continued to flow. What we've actually seen is that whilst there's been a lot of focus on upstream energy, what we've actually seen is that generally for crude oil and refined fuels, whilst imports into the major manufacturing centers, China, Japan, Singapore, Taiwan, actually their shipments of refined fuels, they've replaced the 60 or 70% reduction in what they're getting from the Middle East with supplies from the rest of the world, and of course their own stockpiles as well. When we start to look at some of the downstream products, particularly petrochemicals, so ethylene polymers, propylene polymers that are used in plastics, which are used in pretty much any manufactured good, actually global buyers have not been able to find alternative sources. And in fact, for those big Asian centers, we've seen drops of between 30% and 40% in May versus earlier in the year. For some of the other more specialty products, less of an issue.

Unwrought aluminium, particularly where there's been attacks on plants in the region that have led potentially to a longer-term reduction in availability, we've actually only seen a minor decline overall in global shipments of that product. And that's partly because there's oversupply.

So generally what we've seen is, depending on the product, there are global supplies available, but the plastic supply chains in particular are the most heavily impacted. We'll only really begin to see that feed through into supply chain activities during the rest of the third quarter and into the fourth quarter, which are the peak manufacturing and sales seasons for a lot of those goods. So, I think, Ralf, the general message is mixed so far. But generally, buyers have struggled.

Ralf Wiegert

Thank you, Chris. Jamil, what does the latest economic data tell us for the GCC countries?

Jamil Nayyem

Thanks, Ralf. The numbers are telling us a story. So, S&P Global Market Intelligence's own PMIs, the Purchasing Managers' Indices that gauge the performance of non-hydrocarbon sectors, suggest a tentative improvement of supply conditions across the GCC in June. Suppliers' delivery times actually shortened in the UAE and Saudi Arabia in June because firms adapted trade routes and regional shipping conditions improved. They also shortened in Qatar, along with a modest pickup in input buying. And all this suggests that supply chains are capable of normalizing, even as demand remains uneven and confidence remains dependent on geopolitical conditions.

Ralf Wiegert

Thank you for this current outlook. Let's dive a little deeper into the subject. Kevyn, when clients talk about Hormuz alternatives, how should they distinguish temporary from permanent bypass routes?

Kevyn Lim

Sure. Look, the first distinction is between quote-unquote quick fix workarounds that preserve continuity and infrastructure that alters the default routing logic. Temporary bypass routes keep flows moving in the near term, even when the Strait of Hormuz is not actually physically closed off, but transits nonetheless remain under threat of attack or are commercially difficult because of insurance permits and shipowner risk tolerance levels. In that environment, supply chains must adapt. Think ship-to-ship transfers outside of the Strait of Hormuz, feeder services going into alternative ports, and overland trucking. These are quick to deploy, but are constrained by logistics capacity, cost, and insecurity. Permanent bypass pathways are more scalable and comprise structural assets and network investments designed to reduce specifically structural dependence on Hormuz. There are three broad categories.

Number one, energy pipelines and associated export terminals. Examples include Saudi Arabia's East-West oil pipeline to Yanbu and the UAE's Habshan-Fujairah pipeline, both of which already exist and have operated through this war. These assets offer permanent routable capacity rather than relying on ad hoc shipping or trucking workarounds. The second category is port rerouting and port capacity outside the strait. During the active high-intensity phase of the war, port calling patterns shifted. We saw, for instance, port calls at Jebel Ali, Khalifa Port, and Dammam within Gulf waters decline significantly, while Khor Fakkan and Jeddah outside the strait saw relative gains. That pattern reflects a system that has learned it can effectively re-anchor flows and hence adapt.

The third category is essentially overland rail and corridor connectivity, which is slower and more complex. We have multimodal routes combining shipping, rail, and roads that freight movers or states have aimed at more fully operationalizing. There is also the GCC Railway Project, construction of which remains incomplete, and it also faces and will continue facing soft infrastructure bottlenecks such as agreements over customs procedures and jurisdictional responsibility for cross-border freight rail operations. Railway freight will also not be a full substitute for seaborne cargo in terms of scale, but structurally it is part of that longer-term permanent bypass logic, reducing exposure around a single point of failure, which in this case is Hormuz. Let's be clear, the Gulf will not be Hormuz-free. Instead, it will become more layered, more networked, more diversified. Even if we assume that transits were to normalize to pre-war levels today, we think this broader bypass narrative will carry momentum, certainly for as long as regional states assess an ongoing Iranian ability and willingness to continue reimposing restrictions around Hormuz.

Ralf Wiegert

And in practical terms, Kevyn, what alternatives to the Strait of Hormuz should clients be watching most closely?

Kevyn Lim

So the most important near-term developments are still oil-focused, and the most prominent project I'll mention here is the second West-East crude pipeline to Fujairah on the Gulf of Oman that the UAE has been developing and is aiming to finish by next year. So the existing parallel Habshan-Fujairah routes mentioned earlier already allow UAE crude to reach a terminal outside the strait. And the additional capacity under development would materially increase that option.

Ralf Wiegert

And who are the main beneficiaries if these Hormuz bypasses and wider GCC infrastructure upgrades continue to advance?

Kevyn Lim

Sure. So great question. So broader benefits would also come from the way that project adjacent sectors, networks and infrastructure could deepen broader trade and economic integration. So take the GCC railway example. A fully functioning regional rail system would give, I'm thinking, manufacturers, retailers, logistics firms, and ports a more predictable inland freight option. And this will help reduce transit times, lower cross-border frictions, and help connect industrial zones more broadly and more efficiently with seaports and consumer markets. The main beneficiaries would therefore include logistics hubs, industrial zones, port operators, freight forwarders, warehousing providers, and wholesale and retail firms trading across GCC borders. For governments, specifically, the strategic gain is that rail and corridor integration supports diversification by making GCC economies operate more like an integrated market rather than as separate and sometimes disjointed national trade and logistics ecosystems. So in that sense, while Hormuz bypasses remain important for resilience, the bigger long-term upside is stronger non-oil connectivity, higher intra-GCC trade, and more private sector investment in regional value chains.

Ralf Wiegert

Now, as rail, ports, and bypass corridors become more central to GCC integration, the next question is whether these assets are resilient enough to withstand disruption. What is your take there?

Kevyn Lim

Excellent question. So even permanent assets will remain vulnerable. So our report, the strategic report, is clear that pipeline and terminal infrastructure remain and will remain exposed to the same type of security risks. The difference is that number one, Iran's perception of sovereign control over the Strait of Hormuz makes it easier for Iran to continually focus on restricting shipping as is continuing to be the case. And the second difference is that if attacked, bypass routes can still be repaired or rebalanced more quickly. And the existence of multiple routes reduces the probability that a single attack fully collapses export or import capacity.

Ralf Wiegert

Now let's look at the beneficiaries from an economic perspective. And Jamil, from a macro perspective, are there sectoral spillovers that matter for growth momentum, for the growth outlook?

Jamil Nayyem

Yes. In a nutshell, sectors that stand to benefit the most are energy, construction, infrastructure, and services, including financial intermediation and insurance. That would help sustain economic activity momentum or support it and allow for a further expansion of the non-oil sectors in the next few years, provided fiscal discipline is maintained and execution capacity is not overwhelmed.

Ralf Wiegert

Right. For now, let's look a little bit further on the GCC's strategic role in global supply chains. Even before long-term adaptations in the form of infrastructure, Hormuz bypasses and so on can be put into place, we need to see short-term recovery. What do you see the time to recovery being, Chris?

Chris Rogers

Yeah, thanks, Ralf. So I think clearly, as I mentioned earlier, different products are being affected in different ways and so will take different amounts of time to recover. Now, when we're thinking about the energy sector, oil, refined oil, natural gas, the recovery times can be relatively swift. These are globally fungible goods. Obviously different grades of oil will make a difference. I think one of the questions to ask though is not how quick will recovery be, what does recovery look like? Certainly we've seen within the energy space and to a lesser extent in industrial materials that companies have been willing to draw down their stockpiles. We've seen that in oil with both mainland China and the US pulling on their strategic reserves, and we may well see more of that now that we appear to have rolling disruptions occurring to shipping through the region. But generally speaking, if we only saw a return to previous levels of flows, if we only saw a return to previous levels of inventories, we're going to see recovery take until well into 2027.

And in fact, if, to take an example of those ethylene polymers I mentioned earlier that are so important to plastics that sit at the foot of so many different supply chains, even if we saw exports from the region increase to 30% above their average levels, we would only get back to stabilization in terms of inventory rebuild into the key manufacturing markets in Asia by July of 2027. To get up to the first quarter, specifically for ethylene polymers, you'd have to see flows increase to 50% above their historic levels. So that would suggest to us that we are going to continue to see disruptions to goods flows, whether that takes the form of shortages, product adaptations. One of the most interesting changes has been a shift in the use of colorings, for example, in the consumer goods sector. Those will still take several months to unwind. In terms of indicators we'd be watching there, corporate reporting on inventory level and costs. I think how that develops, and we're about to start the corporate earnings season across most of Europe, Asia, and North America. That will give us a sign of whether companies are able to cope on an ongoing basis or whether more radical measures are going to be needed, Ralf, at least in terms of the short term.

Ralf Wiegert

Yeah, thank you, Chris. And looking for the longer term, is the restructuring of the physical infrastructure for getting goods out of the region going to be sufficient to ensure a return to business as usual for global supply chain sourcing plans?

Chris Rogers

It won't hurt, but it won't solve the whole problem. As Kevyn's alluded to already, for the non-oil transportation, the volumes available, particularly rail networks, for example, running out to Jeddah for the containerized freight sector, the volumes involved are just so much lower. A typical rail transit, a typical train can carry maybe something in the order of 100 or so 20-foot equivalent containers. Each vessel is typically, if it's running into one of the large deepwater ports can unload 2,000 every day. That's 20 trains a day. That's a lot of capacity even compared to a lot of the mature systems. So I think first point is that there is very much that challenge around the volumes of getting through. Secondly, however, when companies are thinking about their supply network sourcing, they always look at diversification from the concept of both risk management and in terms of cost control.

And so if these alternative routes are more expensive, then they may not be attractive to firms that always have to focus on the cost element. For risk diversification, clearly the degree of diversification needed will vary by market. If we look again at these ethylene polymers, the Middle East region accounts for just over one-fifth of global trade, but for imports into mainland China and the ASEAN region, and particularly South Asia, it's much higher. In the case of South Asia, it's around 50 to 55%. That degree of reliance, the continuing risk, and the limited shipping capacity means that those regions will need to look at alternative sourcing. They will need to look outside the Middle East if they want to carry out that risk mitigation. But again, that will come with additional costs, either because new capacity needs to be built outside the Middle East or because they'll simply have to buy their way into the queues for supplies from elsewhere, particularly the EU, which is very much self-reliant, North America, which is also very much self-reliant.

So no, I don't think those networks on their own are going to allow a full recovery. Really, that's only going to come from either a price response pulling in supply from elsewhere in the world, or inevitably that will turn into a demand response, i.e., reduced shipping from the region. So I think it's a necessary but not sufficient condition for success.

Ralf Wiegert

Yeah, thank you. And what will success look like for GCC exporters and governments?

Chris Rogers

Yeah, clearly in very simplistic terms, success looks like a return to previous trade flows. Right? So this kind of pattern I mentioned where they have around a fifth of flows of petrochemicals, somewhat lower in global aluminum, but getting back to those levels is clearly an area of success. The other area of success is demonstrating that these big capital projects can be successfully delivered. And the game has changed compared to when a lot of these original ports in the area were initially being put into place. One area for success is clearly efficiency of port operations, and we've seen that in our Container Port Performance Index, CPPI, where we measure, amongst other things, the amount of time it takes for a container to move. When we look at some of the more recent port developments, some of the investments made, actually the GCC port authorities have done a great job of putting those assets into service. If we look at the larger port moves, so around 2,000 to 2,500 containers per vessel, what we're seeing is that the minutes per container move in Hamad, Jebel Ali, and Jeddah are actually as good as anything else we see in the world, particularly Singapore and Shanghai, which have high levels of automation.

But again, we're talking about billions of dollars of potential investments in assets that haven't been built before. The push towards new rail networks, which are by their nature complex to run. Anybody that's taken a train in the region or indeed in the US or in Northern Europe knows that cargo trains have very different schedules and that management process is a lot more complex. But I would say successfully delivering the infrastructure, returning to prior market share levels are 2 areas and I think the third area, and this is where these vision statements have become so much more important, is how to start using more downstream manufacturing for these resources. One way to change the game would be to bring more manufacturing to the region. So don't just export the ethylene polymers, but to actually make the plastic products and so on further downstream. We see this around the world. We see it in, for example, in Latin America where countries are trying to bolster their position in critical minerals into the battery sector and the auto sector. So I think successful vision statements will start to move beyond short-term asset investment in infrastructure and start to think about longer-term positioning in manufacturing.

Ralf Wiegert

Thank you, Chris. And I'm grateful that you mentioned the vision statements right now because this allows me to segue into the next question for Jamil. Shifting the focus back to the strategies of the GCC countries I've been following the last couple of years, they're also looking at the policy logic behind the bypass buildout. Are the GCC vision plans still on course or have recent developments superseded them?

Jamil Nayyem

Thanks, Ralf. That's actually an interesting question. I'd say that the vision plans are still on course. But they're being reframed. So the underlying objectives, boosting competitiveness, building non-oil capacity, diversification remain. What's changing is the prioritization lens. So after corridor shocks, resilience is no longer an add-on to competitiveness. It is part of it.

So project pipelines that boost energy security, trade continuity, logistics reliability, they become more attractive. On the other hand, projects that rely on stable, long-duration expectations may face slower sequencing because the macro risk and the security risks are changing financing assumptions and delivery timelines. And what has changed most since the Iran War is the way projects are being funded rather than the long-term ambition itself. Lenders and investors are now building larger cushions for uncertainty, so they're asking for more compensation for risk. So funding is likely easier for projects where revenue is clearly locked in, either through explicit government backing or long-term contracts. And at the same time, sponsors are allowing for more time and extra budget headroom to account for potential disruptions to supply chains, shipping, insurance. There's also more caution around structures that depend on refinancing down the line. Projects can still move forward.

What I'm saying is that the terms are tougher. And the focus is firmly on predictability and deliverability.

Ralf Wiegert

Thank you, Jamil. While I have you, your report focuses on Iran's recovery trajectory. How should clients interpret that for growth expectations and regional trade continuity?

Jamil Nayyem

Yeah, Ralf, the report's core message is that recovery is possible but constrained. First, without a durable long-term political agreement, recovery will remain fragile. Even where a reconstruction fund is discussed, the report assesses that activation depends on durable agreement outcomes, particularly sanctions removal. And even with durable sanctions relief, hurdles for translating pledges into invested capital actually remain high. Second, the report foresees a gradual pickup in oil exports in Iran, which would allow for an 8.1% rebound in real GDP growth in fiscal year 2027, that's from a 5.7% contraction in fiscal year 2026, according to our just issued July forecasts. That rests on the assumption of a gradual reduction of risks of a resumption of high-intensity war. However, even if our baseline outlook ends up materializing, growth is likely to slow after 2027. We see limited medium-term growth prospects for Iran because of the persistence of sanctions risk and unresolved issues. We do not see real GDP growth averaging more than 3.0% in the medium-term timeframe. So between fiscal years 2028 and 2032.

And third, the report emphasizes reconstruction sequencing. First, essential services, so power, water, fuel distributions, healthcare, telecoms, then revenue-generating infrastructure such as energy value chain assets and export-oriented transport links. And this sequencing is important because it shapes demand for contractors, for equipment, and for logistics services over time. And fourth and finally, inflation is a macro constraint and it remains a macro constraint. We do expect inflation to peak this year and to gradually ease thereafter, but it will likely remain high in Iran because of currency weakness and because of the interaction between global energy prices and domestic supply conditions.

And this is impacting, or likely to impact, the government's ability to sustain reconstruction spending in the next few years as it manages debt and financing needs. S&P Global Market Intelligence expects average annual inflation in Iran to peak at 77.1% on a yearly basis in 2026, gradually ease next year and average 42.8%, ease further in the next few years, but remain in low double digits on average in the medium-term timeframe.

Ralf Wiegert

Thank you. So for the wider GCC planning lens, the risk is that recovery is uneven and it depends on political and sanction trajectories. Is that correct?

Jamil Nayyem

Exactly. Regionally, that means uncertainty remains high for trade continuity planning, and investor time horizons. This is not to say that recovery is impossible, but because the financing and government conditions that would make recovery durable remain uncertain at this juncture. At the same time, we do expect a rebound in, a gradual rebound in oil production, likelier in 2027 than in 2026. And this, in our assessment, would allow for a 7% growth in real GDP across the GCC on average in 2027. And this would be accompanied by a shift of investment towards security and infrastructure projects that reduce exposure to the Strait of Hormuz. Concretely, this means a focus on further pipeline capacity expansions, export terminals, but also non-oil trades such as railway links that would boost inland connectivity and enhance regional logistics resilience. The recalibration of Saudi Vision 2030 that started last year before the Iran war is likely to continue rather than reverse, but with a greater focus on sequencing, execution capacity, and projects that support resilience.

In the UAE and Saudi Arabia in particular, we think that governments will double down on AI investments, be it coding capabilities or data centers, in an overall effort to deepen digital infrastructure, boost competitiveness and productivity, and anchor higher-value diversification. And the GCC non-oil sectors are likely to continue growing in the next few years after a very gradual recovery in the shorter term. If we look at June PMI readings across the GCC, we see a region that's still grappling with conflict-related disruptions and elevated cost pressures, albeit with some early signs of stabilization in logistics and demand. So the PMIs show that the Saudi non-oil economy remains in expansion mode because of firmer domestic demand and a pickup in new business. In June, the UAE remains slightly in expansion mode, but slowed to a near-term halt. In June, Qatar and Kuwait remain in contraction mode, although Qatar has improved relative to May levels. One common thread across these geographies is inflation.

Firms across markets are reporting a steep rise in input costs because of higher wages and operating costs in Qatar and Kuwait, because of freight and transport and commodity costs in the UAE and Saudi Arabia. And these, the companies have been raising selling prices to end customers, albeit with evidence in the UAE that competition has prevented or squeezed margins and actually forced a limited pass-through of input costs to end consumers.

Ralf Wiegert

That view is very good. The delivery risk point is especially important in the July macro outlook because we have reduced considerably our oil price assumptions. Jamil, if prices normalize before production and export volumes have fully recovered, what does that mean for project schedules and fiscal room in the more financially constrained GCC economies?

Jamil Nayyem

Ralf, the risk is that project schedules lengthen rather than being canceled outright. The pressure is most visible on financially weaker GCC countries, primarily Bahrain, where fiscal buffers are thinner and debt dynamics are already sensitive to lower hydrocarbon revenue. Kuwait faces a version of this risk, not because of weak balance sheet capacity in the same way, but because of government liquidity risks in case of a sustained fall in hydrocarbon revenues that account for more than 80% of total government receipts. And more broadly, oil exporters, Kuwait, Bahrain, Iraq, have not been able to benefit fully from the high oil prices seen in the second quarter because production and export flows were still constrained by the Hormuz crisis. And now they face a weaker revenue outlook because of lower oil price projections and because output has not yet been able to ramp up enough to compensate for that. What I'm saying here is that this reduces fiscal room, delays procurement and financing decisions, and raises the likelihood that lower priority or more discretionary projects are pushed further out.

Ralf Wiegert

Chris, and in that context, what about momentum challenges from a supply chain side?

Chris Rogers

Yeah, I think that's a great issue to address. What we've generally seen is one-and-done risks that emerge in a supply chain are either normally ignored or just healed around temporarily, particularly if procurement teams see that a path to recovery is both implemented and maintained. So for example, we see very often at a micro scale in a plant, at a larger scale, we've seen with the issues around the Panama Canal. The companies put in place coping mechanisms to deal with the low water levels that we typically get in an El Niño year. So planning can be done there. We've seen it to a certain extent as well with tariffs where companies have gone, okay, today is another round of tariffs. We adapt our supply chain to deal with tariffs generally, but we know that those individual areas will be limited. The challenge here is the unpredictability of the recovery curve. As we've talked about, we have a conflict where we had a period of a memorandum of understanding, peace has broken down a bit. That's leading to on-again, off-again issues for transits through the Strait for all of the different product areas. And what we may find, Ralf, is that as overseas buyers try and deal with this continued volatility, they may well say, actually, it's just going to be easier to cut the Middle East supplies out of our supply chain altogether. And I think that continued stumbling over the reopening is the main momentum challenge facing supply chains at the moment.

Ralf Wiegert

Thank you. Now let's have a brief overview from all presenters. Where do you see emerging opportunities from the situation? Start with Chris there again.

Chris Rogers

Yeah, I think as exporters from the region get these new routes to market that Kevyn's report has talked about, we’d be looking for them to leverage not just a return to previous product flows, but also to take this as an opportunity to start building out manufacturing more broadly, leveraging that strength in petrochemicals and plastics into a wider manufacturing boom.

Ralf Wiegert

All right, Jamil, where do you see opportunities emerging from an economic point of view?

Jamil Nayyem

What I'll say is that resilience-enabled diversification is the key driver going forward. It helps shift investment towards projects that improve or at least maintain wartime productivity while striving to reduce uncertainty rather than only projects that rely on stable external demand assumptions.

Ralf Wiegert

Right. And Kevyn, from a country risk side?

Kevyn Lim

Sure. So from a country risk side, I think an opportunity lies in the reinforcement of predictability. So businesses and investors need clarity on how unblocked, quote-unquote, or alternative bypass passage is going to be governed or regulated in practice. Meaning, for instance, that there won't be legal disputes arising between countries. And these businesses and investors also need confidence that project announcements will move or have moved into the execution phase. Without that, resilient spending can still happen, but private sector participation in longer-term or longer horizon investment will slow down because of remaining uncertainty over the risk-adjusted returns.

Kristen Hallam

Thank you for listening to the Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.