Spillover from Israel-Iran war could slow Gulf investment inflow in 2025, warns World Bank GCC director

Investors likely to adopt a wait-and-see approach to region, Safaa El-Kogali says

Safaa El-Kogali, the World Bank's country director for the Gulf region. Salim A. Essaid / The National

Foreign direct investment in the Gulf could slow in the second half of this year as the war between Iran and Israel dents investor sentiment, in a similar impact of global uncertainty, the World Bank's GCC countries director said.

Investors will probably adopt a wait-and-see approach as the conflict that started with Israel's attacks on Iran's nuclear sites on June 12 worsens, Safaa El-Kogali told The National in Riyadh.

“Even if they've started [investing beforehand], they [foreign investors] might hold off until they see things settling down a bit,” she said on the sidelines of a World Bank seminar on Sunday.

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De-escalation does not seem likely after President Donald Trump ordered the first-ever direct US military attack on Iranian soil earlier that day. The US attacked three Iran nuclear facilities with six bunker-buster bombs and launched Tomahawk missiles.

GCC countries had varied in their ability to attract FDI in 2024.

The UAE received Dh167 billion ($45.5 billion) in foreign direct investment last year, Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, said in a post on X on Thursday. This represented a 48 per cent increase, he added.

The UAE accounted for 37 per cent of the total foreign investment flows in the region, he said.

Saudi Arabia's net FDI inflows in 2024 decreased as a share of GDP, amounting to 1.1 per cent compared to 2.1 per cent in 2023, according to a recent report by the World Bank.

Bahrain, Kuwait, and Qatar saw FDI fall by 7.3 per cent, 2.3 per cent and 0.5 per cent of GDP respectively from 2023 to 2024, it added.

Oman saw FDI increase by 2.4 per cent of GDP. This was due to “prudent fiscal management and diversification efforts” the report said.

What is the impact?

No one can accurately measure the impact of the escalation on the regional economies, but peace is necessary for economic security and the implications will be broad, Ms El-Kogali said.

“Increasing costs of commodities, of shipments – this will impact a number of industries that import raw material”, she said. The conflict will add to inflation, which will affect investors and consumers alike, she added.

“Whenever there is uncertainty … in any region, tourists usually decide not to go,” she said.

Travel and tourism made up about 11.4 per cent of the region's gross domestic product in 2024, according to the latest data from the Statistical Centre for the Co-operation Council for the Arab Countries of the Gulf.

Oil prices, which have surged since the beginning of the war, will also have an impact on the fiscal balance of Gulf countries that still rely heavily on oil as their primary source of revenue and exports, she said.

Brent and WTI surged by as much as 13 per cent in the first few hours of trading after Israel began its military campaign against Tehran.

Oil prices posted a third weekly gain in a row despite falling on Friday as the war sparked supply fears.

On Friday, Brent, the benchmark for two thirds of the world's oil, fell 2.33 per cent to settle at $77.01 a barrel. West Texas Intermediate, the gauge that tracks US crude, closed 0.28 per cent lower at $74.93 a barrel.

Who will feel it more?

Gulf countries that have diversified away from oil, such as the UAE, are more likely to resist hits caused by global economic uncertainty, Ms El-Kogali said.

This was a key message of the World Bank report, Smart Spending, Stronger Outcomes: Fiscal Policy for a Thriving GCC, released last week, that measured the growth of Gulf economies until June 1.

“I think this report is really timely, because it focuses on what the GCC countries have been doing, and what impact, or the effect, those policies that have been put in place [have had],” said Ms El-Kogali.

“The UAE has started the diversification agenda a while back and currently, with 74 per cent of GDP being from the non-oil sector, puts them in a stronger position.

“The more you diversify, the more you have different opportunities to deal with crises that come your way. When you put all your eggs in one bag, and something happens to that bag, then you're in greater trouble.”

Proper investment

Ms El-Kogali said that higher oil prices can benefit Gulf countries, depending on how revenue is spent in the non-oil sector.

“We think that as the non-oil sector continues to be strong and growing, with the easing off of the oil production cuts, that the countries of the GCC have good gross prospects in the short and medium term,” she said.

“We really expect growth to reach 4.5 per cent by 2026 driven by the oil and the non-oil.” It takes time to see the returns of investments she added.

This growth is particularly important during period of geoeconomic uncertainty.

However, “there may be the risk of spillovers” of the war which will impact the growth trajectory of Gulf nations, she said.

Gulf countries have been prudent in the past during crises and “we saw that implementing fiscal spending during downturns had a positive impact”, she said.

There is room to do more to further streamline spending and the Gulf countries must prioritise investments that have high returns, and can create jobs during difficult times, that will then sustain growth through economic cycles, she added.