USD Depreciation: Implications for GCC

The recent weakness in the US dollar has sparked debate about potential economic impacts on Gulf Cooperation Council (GCC) economies, which maintain currency pegs to the USD and derive significant revenue from dollar-denominated oil exports.

Historically, while some episodes have shown resilience, others created genuine challenges. Our analysis suggests that structural changes in regional economies make them more resilient to future currency shocks:

Shifted Export Markets:
GCC economies now export primarily to Asia (70% new goes to China, Japan, India, Korea and Asean vs 30% in 1995), so that USD depreciation means lower hydrocarbon prices in local currencies and an increase in demand.

Increased Diversification:
GCC economies are much more diversified than before and now better equipped to handle shocks.

New Opportunities:
A weaker USD attracts non-USD tourists and real estate investors to the UAE, while cheaper Chinese imports and safe-haven capital inflows bolster GCC economic stability.

Four distinct periods of dollar weakness demonstrate GCC economies' response patterns, from inflation vulnerability to strategic advantage.

Historical Episodes

1993-1995:
The dollar's 20% decline against the yen and deutsche mark triggered inflationary pressures in Saudi Arabia, with inflation rising from 1.3% to 5% as import costs from Europe and Japan surged. Construction costs in particular increased by 8.3% as materials from non-dollar economies became more expensive.

2002-2008:
The dollar lost roughly 40% of its value against the euro during this period, yet GCC economies thrived. Saudi Arabia's GDP tripled from $189 billion in 2002 to $519 billion in 2008. UAE's economy grew at an average annual rate of 8.2% despite the weakening dollar. Why? Because oil prices surged from $25 to $147 per barrel during this same period, overwhelming any negative currency effects.

2010-2011:
Dollar weakness contributed to food price inflation across the GCC. In the UAE, food inflation reached 12.3% as imports from Europe became more expensive, prompting government subsidies. Qatar saw overall inflation spike to 4.8%, with imported goods from the Eurozone rising in price by nearly 15%.

2017-2018:
The dollar index fell about 15% between January 2017 and February 2018. Result for GCC? Saudi Arabia's non-oil private sector PMI strengthened from 55.5 to 57.3 during this period. UAE's hospitality sector saw a 3.5% increase in European visitors and a 6.7% rise in Chinese tourists. The feared inflation spike never materialized, with UAE inflation actually declining from 2.4% to 1.9% between January 2017 and March 2018.

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U.S. Dollar Index (with periods of dollar depreciation)

The most troubling of the currency weakness episodes are those which occur when oil prices have also been low, such as in 1993-1995. The recent drop in oil prices from $70 per barrel down to a low of $58 is therefore concerning and matters greatly for how the GCC economies will fare.

And while some GCC economies are better prepared to handle these oil price disruptions, others don’t necessarily have the fiscal space to do so. However, our base case scenario is that oil prices are unlikely to stay below $60 for very long, given the high extraction costs of U.S. shale oil.

Structural Changes in GCC Economies

While traditional economics suggests that dollar depreciation should create imported inflation for dollar-pegged economies, several structural changes and unique aspects of the current situation should shield the region from the worst impacts.

Fundamental shifts from export reorientation, Chinese trade spillovers, tourism/real estate sector growth, safe-haven capital inflows, and sophisticated financial infrastructure make the region more resilience.

First, the result of the U.S. shale revolution has been a shift in GCC hydrocarbon exports toward Asia, with over 70% of GCC oil and gas exports—approximately 9.8 million barrels per day (bpd) of crude oil in 2024 - destined for Asian markets (20% China, 15% India, 15% Japan, 10% ASEAN). Unlike when oil was shipped mainly to the U.S., a weaker dollar now actually increases demand as these exports become relatively cheaper for Asian buyers.

Second, tariffs on Chinese goods by the U.S. have created manufacturing overcapacity that China needs to redirect elsewhere. Chinese consumer electronics, appliances, vehicles, and industrial goods that can't enter U.S. markets are being offered at competitive prices to other regions, including GCC markets. Similarly, China is putting tariffs on grain imports from the U.S. which will have to be redirected. These factors will help offset potential inflationary pressure from dollar depreciation.

Third, a relative drop in the dollar is good for UAE tourism - visiting just became cheaper for everyone not pegged to USD. The same is true of the UAE property markets - if you're a non-dollar buyer, UAE real estate just went on sale. Moreover, these sectors have become significantly larger components of the GCC economies than during previous dollar depreciation episodes.

Finally, while USD weakness traditionally accelerates remittance outflows by expatriate workers taking advantage of favorable exchange rates, this effect is now counterbalanced by the region's growing safe-haven status. The stability of the UAE coupled with the effective "discount" from dollar depreciation makes it increasingly appealing for global capital.

Unlike the 1993-1995 period or 2010-2011, when the region had fewer financial products and investment vehicles to attract global capital, today's GCC offers sophisticated wealth management services and investment infrastructure that can capitalize on dollar weakness rather than merely endure it.

Conclusion

The region's economic diversification efforts, shifted export markets, and enhanced financial infrastructure have created multiple buffers against adverse currency movements.

For investors, the GCC—especially the UAE—now represents a compelling proposition during periods of dollar weakness: a stable, dollar-pegged environment offering relative value compared to traditional markets, with sophisticated financial systems and growing non-oil sectors capable of attracting global capital flows.

In an increasingly fragmented global financial landscape, GCC economies are positioned to benefit from their strategic location, political stability, and dollar peg during periods of USD depreciation.