Gulf markets are beginning to weigh the ripple effects of fiscal paralysis in Washington as the US government shutdown stretches into a second week, experts told Arabian Business.
The budget standoff, which has suspended nearly 40 per cent of the US federal workforce and frozen key data releases such as payrolls and inflation, is leaving global traders without the world’s most important economic compass. For Gulf states whose currencies are pegged to the US dollar, that uncertainty complicates monetary alignment.
“The Fed is expected to cut rates by 75 basis points in 2025, but the shutdown may delay this timeline,” Hamza Dweik, Head of Trading MENA at Saxo Bank, told Arabian Business. “GCC liquidity could tighten temporarily if US rate signals remain unclear, especially as inflation risks persist due to tariff-driven price pressures.”
Most GCC central banks shadow Fed moves to maintain their pegs. A prolonged data blackout, analysts warn, could force policymakers in Riyadh, Abu Dhabi and Doha to rely more heavily on domestic indicators while awaiting clearer guidance from Washington.
Vijay Valecha, Chief Investment Officer at Century Financial, said the episode would highlight the GCC’s structural dependence on US cycles
“A prolonged U.S. shutdown would not directly threaten the GCC currency pegs, but it could create temporary liquidity mismatches and complicate the timing of rate adjustments,” he told Arabian Business. “GCC central banks would likely respond through domestic liquidity management tools such as open market operations or changes in reserve requirements, rather than diverging sharply from US policy.”
Oil demand and fiscal breakevens in focus
So far, Brent prices have held near $84 a barrel, supported by OPEC+ supply discipline and sanctions on Iran and Russia. Yet the spectre of weaker US and global growth could eventually weigh on demand – a worrying prospect for energy-exporting Gulf budgets already operating close to their fiscal breakevens.
“Saudi Arabia, Bahrain, and Iran are already operating below their fiscal breakeven oil price and may need to tap reserves or borrow more if prices soften,” Dweik said. Valecha added that additional supply from Iraq’s reopened northern pipeline and higher Russian seaborne exports have eroded market tightness.
“The Brent backwardation is at its smallest since last November,” he noted. He said that points to weaker fundamentals if a US slowdown deepens.
The IMF recently warned that a temporary slide to $40 oil could cut non-hydrocarbon GDP growth in the GCC by 1.3 percentage points and widen fiscal deficits “markedly”. While such a scenario remains remote, the fiscal cushion of Gulf states would again be tested should Washington’s gridlock tip global sentiment.
Sovereign funds eye diversification, but the US still dominates
Gulf sovereign wealth funds remain among the largest holders of US assets. Political dysfunction and rising Treasury yields have reignited debate over diversification, yet few are pulling back meaningfully.
Valecha said that despite a downgrade to US sovereign credit, managers such as the Kuwait Investment Authority have reaffirmed their commitment to US markets, citing comments by managing director Sheikh Saoud Salem Abdulaziz Al-Sabah.
Still, Dweik said the erosion of US institutional credibility “is already prompting portfolio diversification”. If Washington’s fiscal battles drive yields higher, some Gulf funds could tilt further toward Europe, Asia or domestic infrastructure investments – a continuation of the trend that saw MENA sovereigns account for 40 per cent of global SWF deal activity last year, with roughly $56 billion deployed by Abu Dhabi funds alone.
Equity resilience meets global risk aversion
Regional bourses have so far shrugged off the turmoil. Dubai’s DFM is up 15 per cent year-to-date and Abu Dhabi’s ADX about 7 per cent, supported by steady oil receipts and a healthy IPO pipeline. But experts warn that if the shutdown triggers a broader “risk-off” wave, Gulf equities could feel the chill.
“A worsening US fiscal impasse could trigger global risk aversion, potentially cooling IPO momentum in the region,” Dweik said. “Global investors may grow more cautious about new listings if volatility spikes.”
Valecha agreed, noting that GCC equities remain more resilient than other emerging markets thanks to USD-pegged currencies and sovereign backing. “In fact, in a global EM sell-off, GCC could act as a ‘flight-to-stability’ destination,” he said.
Still, higher US yields could reprice valuations, particularly in property-heavy indices. Gulf corporates tapping international bond markets may also face higher costs if Treasuries stay volatile.
Lessons in fiscal credibility
Beyond markets, analysts say the deeper lesson lies in governance. The recurring brinkmanship in Washington – with this year’s fight over healthcare subsidies and spending caps – is undermining confidence in the reliability of US policymaking.
“The shutdown underscores a deeper erosion of confidence in US fiscal governance,” Dweik said. “For Gulf policymakers, the lesson is clear: diversification and economic resilience are no longer optional.”
Valecha said the short-term hit to the US economy would likely be modest – shaving 0.1 to 0.2 percentage points off GDP for each week of closure – but the reputational damage could linger.
“Constant standoffs over budgets and debt ceilings make investors question how predictable and reliable US fiscal policy really is,” he said. “For Gulf economies, it reinforces the case for deeper local capital markets and stronger non-oil revenue bases.”
Forecasters expect the US dollar to soften further if the shutdown drags on and rate cuts are delayed. For the GCC, that could mean higher import costs – and modest inflation pressure – but also a lift for gold and commodity holdings that many regional investors treat as hedges, Dweik said.
He added that a softer dollar could lift gold and commodity prices, offering hedges for Gulf investors.
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