Gulf states' money machine sputters due to the Iran war

Dubai – Gulf states’ money concept with buildings — (Image credit: Getty Images)

Gulf states’ money has been hard to escape over the past few years. The influence of the United Arab Emirates, Saudi Arabia and Bahrain was everywhere. Saudi Arabia was a huge investor in sport and gaming as well as in infrastructure. Qatar was one of the key backers of Anthropic, the company behind Claude AI, the key rival to ChatGPT, as well as backing data centres. The takeover of Warner Brothers by Paramount was financed, in a large measure, by money from Saudi Arabia, Qatar and Abu Dhabi.

The list goes on. Whenever there was a big deal, a takeover, a venture-capital round or a new listing, Gulf states’ money was central to it. That was just what was reported. Through investment in private equity, hedge funds and property, there was probably far more than could easily be tracked. The Persian Gulf was also a major source of demand. Airbus would not be nearly so successful without all the new aircraft ordered from Gulf-state mega-carriers such as Emirates and Qatar Airlines. London's law firms, consultants, architects and engineers made huge sums selling their services into the region. One way or another, Gulf states' money became critical to the global economy.

It may be about to dry up. The Gulf states did not start the war against Iran, but they may well end up as its main victims. The Iranians have targeted them all with drone strikes and they have already done substantial damage. Worse, they have sullied the region's image. Not many people will want to fly through Gulf airports on their way to Asia when there are other routes available. Jobs in Dubai will look a lot less tempting, even if they are tax-free; and a holiday there won't tempt many of us, even if the hotels are luxurious and the sunshine guaranteed. Oil and gas revenues will start to disappear as critical infrastructure is damaged and shipping routes shut. The costs of reconstruction will be huge. The war is going to prove very expensive for all the Gulf states.

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And it is not as if they were in great financial shape to start with. Saudi Arabia ran a budget deficit of more than 5% of GDP last year; Qatar and Bahrain also ran deficits. Taxes have started to be introduced across the region to make up some of the shortfall. The UAE introduced a 9% corporate tax in 2023; Bahrain is planning to introduce one at 10%. Taxes are still very low by the standards of the major Western economies, but even so they were starting to creep up – a sure sign governments were under financial pressure. With the costs of the war, that is only going to increase.

One point is certain: the huge flows of Gulf money cascading into the global financial system are going to dry up. Very soon, they may start to return home. Assets will have to be sold to pay for all the costs. It probably won't happen immediately – the huge portfolios are too well-managed to start a fire-sale. But over the next few months, plenty of Gulf-owned portfolios may start to be quietly put on the market.

Gulf states’ money is sailing out of markets

That will pose a threat to the global financial system. To start with, IPOs will be harder. Some huge new listings were planned for this year, such as SpaceX and OpenAI, along with plenty of smaller ones. And yet, the valuations depended on Gulf funds buying up lots of shares. If that money is not available, many of those will have to be postponed, or the sellers will have to accept a lower price.

Trophy assets will be stranded. Football clubs, for example, were sold from one Gulf buyer to another, and so were media properties and skyscrapers. Owning them came with a lot of prestige, and that counted for a lot in the Persian Gulf. If those buyers are not around there will be no one to replace them.

Finally, illiquid assets such as private-equity funds will be under huge pressure. The Persian Gulf was one of the main sources of fresh money. As that dries up, they will find it very hard to access fresh funds and may face a wave of redemptions. Private-equity funds could turn into forced sellers quickly.

The reality is that the Gulf money machine was one of the key drivers of the bull market of the past five years. There was always more cash to pour into whatever the latest fad happened to be or to finance a huge takeover deal. It was the key source of risk capital. It is about to disappear – and that means it will be far harder to raise investment or to keep valuations as high as they have been.

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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.