Impact of US tariffs on Middle East economies to remain limited, S&P says

There are possible upsides for some regional economies as US dollar weakens

An exhibitor shows a gold ornament to a customer at a jewellery shop inside the gold market in Dubai. The IMF expects the UAE economy to grow 4 per cent this year despite tariff uncertainty. EPA

The overall direct impact of new US tariffs remains contained in the Middle East and North Africa, despite potential negative effects of falling crude prices and decreased revenue for the region’s oil-exporting economies, S&P Global has said.

There are opportunities for increased trade and investment flows as well as improved local competitiveness due to a weaker US dollar, which could help in mitigating the negative impact of tariffs on the broader region, the ratings agency said in its latest market intelligence report.

“The adverse direct impact of US tariffs on the Mena region will be contained, but could be magnified by falling oil prices, or mitigated by indirect effects, such as increased trade and investment flows to Mena,” Ralf Wiegert, head of Mena Economics at S&P Global Market Intelligence, said.

The indirect impact of the higher US tariffs will probably vary between Mena economies as there are several different transmission channels involved, which could either “worsen the direct impact, partly compensate, or even turn the impact to net positive”, according to the S&P report.

Among the possible factors that can help some Mena sovereigns to tackle the impact of tariffs are “reduced energy subsidies and lower interest rates, particularly for countries like the UAE and Morocco”, the report added.

US President Donald Trump is delivering on his campaign promise of slapping tariffs on America's trading partners around the world, to balance its bilateral trade of goods and services. However, the hefty duties he is imposing on 57 trading partners have dented growth prospects of global trade.

US duties hit historic levels, before being paused earlier this month for 90 days, and have stocked fears of marked slowdown in the global economy as well as devastating effects on some of the least developed and developing economies.

Global equity markets have whipsawed, with crude prices seeing a sharp volatility, as Mr Trump’s push for tariffs has rattled investors.

A drop in crude prices in the wake of the tariff-driven economic slowdown and demand erosion will affect the oil-exporting economies of the Middle East, especially the six Gulf states, which account for a third of the world’s proven oil reserves.

Growth forecast revision

On Thursday, the International Monetary Fund said trade tension remains a key risk facing the region’s economic prospects.

The fund expects Mena economies to grow by an average of 2.6 per cent this year, down 1.3 percentage points from the previous estimate. Growth is expected to pick up to 3.4 per cent next year.

“Quite a downgrade,” IMF managing director Kristalina Georgieva said during a news briefing in Washington on Thursday.

The IMF has also cut its 2025 growth prospects for Saudi Arabia, the world's largest oil exporter, from 3.3 per cent to 3 per cent. The UAE economy is expected to grow by 4 per cent this year before expanding by 5 per cent in 2026.

The World Bank earlier this week also said that economic growth in the Mena region will be slower than previously anticipated amid prospects of a global trade war and lower oil revenue. It expects GDP of the wider region to expand 2.6 per cent, a downgrade of 1.3 percentage points from its October Mena forecast.

“Weaker oil prices are likely to force governments to revise their investment spending plans or increase borrowing plans, which will have knock-on effects on growth forecasts for oil exporting countries, including Saudi Arabia and the UAE,” S&P analysts said.

“Oil price risks could threaten financial stability in Iraq and require additional measures to rein in spending for Oman and Bahrain.”

Upside potential

However, the upside for Gulf economies will be the competitiveness of their local production, which will improve with the weaker US dollar relative to non-US dollar area producers, including the euro area, India, China, and Japan.

S&P analysts also expect tariff-driven “diversion effects for trade and investment flows in favour of Mena countries which could be a “key upside risk for several Mena markets”.

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“US companies could seek to circumvent reciprocal tariffs from countries like China against the US and locate production or sales distribution centres in the Mena region,” S&P said.

“Places like the UAE, which have a well-developed trade and infrastructure network, could be prime beneficiaries for this development.”