GCC Banks Brace for Indirect Fallout from Global Tariff War

Limited Direct Impact of Tariffs on GCC Banks
As the tariff war between the U.S. and China escalates, GCC banks are poised to experience limited direct effects. However, the indirect consequences, particularly the decline in oil prices and weaker global economic conditions, pose significant challenges, according to a recent Fitch Ratings report.

The GCC region, which heavily depends on hydrocarbon revenues, may experience reduced economic activity due to falling oil prices. Fitch Ratings notes that GCC exports to the U.S. are predominantly hydrocarbons, which are exempt from tariffs. As a result, banks in the region are insulated from direct shocks caused by the tariffs on non-hydrocarbon goods, which represent a small fraction of the GCC trade with the U.S. However, the real threat lies in the broader economic slowdown and its effects on oil prices.

 

Oil Prices and Global Economic Slowdown
The ripple effects of the escalating tariffs are already being felt in global trade, leading to reduced demand for oil and stifling GCC government spending. Oil prices have a direct correlation with government revenues, particularly in GCC nations, where oil accounts for 60-90% of budget revenues. If oil prices continue to drop, GCC governments may face pressure to scale back spending, which could hinder bank activity in the region.

 

Fitch Ratings and IMF Revised Growth Projections
In March 2025, Fitch Ratings downgraded its global GDP growth forecast to 2.3% for 2025 and 2.2% for 2026, with risks skewed toward a sharper slowdown. The International Monetary Fund (IMF) also cut its forecast for global growth to 2.4% for 2025, citing trade disruptions as a key factor. This reduction in global growth could further suppress commodity prices, including oil, impacting GCC economies.

Fitch originally projected non-oil GDP growth in the GCC region at over 3.5% for 2025 and 2026, but the outlook has been revised downward due to the potential drop in oil prices caused by ongoing tariffs. A prolonged slump in oil prices could lead to a significant reduction in government spending and a slowdown in bank lending growth, which had been forecasted to remain steady in 2025.

 

Corporate Borrowers and Rising Credit Risks
For corporate borrowers in the GCC, the impact of the tariffs could be severe, raising operating costs and inflation. This may squeeze profitability and cash flow, particularly in trade-exposed sectors. The uncertainty surrounding interest rates, combined with the likelihood of delayed U.S. Federal Reserve rate cuts, could further increase the cost of debt, dampening credit demand.

As corporates struggle with rising costs, banks may face increased non-performing loans (NPLs), putting pressure on balance sheets. Dr. Khalid Al Mansour, an economist at the Gulf Research Centre, highlighted that this could elevate credit risks and challenge banks' asset quality.

 

Resilience of GCC Banks Amid Economic Challenges
Despite these challenges, GCC banks are relatively resilient. Many have bolstered their capital buffers in recent years, benefiting from strong earnings due to higher oil prices and favorable interest rates. Liquidity remains strong, and economic activity, particularly in Saudi Arabia and the UAE, continues to grow. "Although GCC banks are well-positioned to withstand moderate shocks, a prolonged slump in oil prices could test even the strongest institutions," noted a banking analyst.

 

Vulnerability of Bahrain's Banking Sector
Among the GCC countries, Bahrain’s banking sector is the most vulnerable. Fitch has assigned Bahrain a 'b+'/negative operating environment score, citing the country's high debt burden and reliance on an elevated break-even oil price of $95 per barrel. This makes Bahrain particularly susceptible to fluctuations in the oil market.

In contrast, stronger sovereign credit profiles in countries like Saudi Arabia (A+/Stable), UAE (AA-/Stable), Qatar (AA/Stable), and Kuwait (AA-/Stable) provide a cushion against economic downturns. The UAE and Saudi Arabia lead the way with the highest bank operating environment scores (‘bbb+’/stable), followed by Qatar and Kuwait (‘bbb’/stable).

 

Diversification in Saudi Arabia and UAE
The diversification efforts in both Saudi Arabia and the UAE provide a buffer against the fluctuating price of oil. However, oil remains the backbone of their economies. While these diversification initiatives help, tariffs and global trade tensions will continue to shape the financial landscape for GCC banks in the coming years.

 

Comment from NYK Law Firm
"While the tariffs themselves may not directly impact the GCC banking sector, the associated economic risks tied to oil prices and global trade can have profound long-term effects. It’s important for businesses and financial institutions in the GCC to stay vigilant, adapt to changing market conditions, and seek legal guidance on navigating these challenges. As lawyers in the region, we recommend exploring proactive strategies to minimize potential risks, particularly in sectors exposed to trade disruptions," said a legal expert from NYK Law Firm.

 

 

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