DUBAI/WASHINGTON: The International Monetary Fund sharply reduced its 2026 growth forecast for the Middle East and North Africa to 1.1 percent on Tuesday as war chokes Gulf oil and gas exports.
Iran, Iraq and Qatar will be particularly hard-hit, the IMF’s World Economic Outlook warned, as it revised down its January prediction of 3.9 percent regional growth this year.
Growth should rebound next year, as long as energy production and transport are “normalized” over the next few months, the IMF predicted. The region’s economies grew 3.2 percent in 2025, it said.
The weeks-long war has hammered production facilities and all but closed the Strait of Hormuz.
Gross domestic product in Iran, hit by intense US-Israeli bombing, will contract 6.1 percent this year, the IMF said, slashing its January forecast by 7.2 percentage points.
In Qatar, whose main liquefied natural gas production site is badly damaged, GDP is expected to shrink 8.6 percent. Iraq’s economy will contract 6.8 percent, the IMF said.
“For commodity exporters directly affected by the conflict, diminished production and exports imply a severe downward revision of GDP growth projections for 2026,” the report said.
The scale of the impact depends “on the degree of damage suffered in energy and transportation infrastructure as well as the dependence on the Strait of Hormuz and availability of alternative export routes,” it added.
Economic damage “is therefore more pronounced for Bahrain, Iran, Iraq, Kuwait, and Qatar and less significant for Oman, Saudi Arabia, and the UAE.”
Bahrain and Kuwait, both heavily targeted by Iran and dependent on Hormuz for exports, were tipped to shrink by 0.5 and 0.6 percent respectively, from growth of more than 3.0 percent last year.
Saudi Arabia, the region’s biggest economy and the world's top oil exporter, whose pipeline to the Red Sea gives it an alternative export route, is expected to grow 3.1 percent.
The UAE was projected to grow 3.1 percent, dropping from 5.8 percent last year.
“For all these economies, growth in 2027 is expected to rebound, based on the assumption that energy production and transportation are normalized over the next few months,” the IMF said.
But this assumption “may need to be revised if the duration of the conflict extends and the degree of damage suffered gets reassessed,” it warned.
Importing countries are also suffering from higher prices for energy and other commodities, the IMF said, citing Egypt, whose growth forecast was cut 0.5 percentage points to 4.2 percent.
Financial stability risks
The IMF warned that since February, global equity prices have declined 8 percent while sovereign bond yields have risen sharply, driven by a jump in energy prices and market expectations of higher inflation.
Bond market volatility has also been spurred by rising debt-to-GDP levels and the greater issuance of short-term securities which are more vulnerable to rollover risks during rising inflation. That could lead funding markets to tighten, which has spurred broader turmoil in the past, the IMF said.
“Markets have corrected in an orderly manner so far, but risks are asymmetric. The longer the conflict continues, the greater the risk that global financial conditions — which had been very accommodative before the war — could tighten further and more abruptly,” the group warned.
There are several channels through which funding strain could escalate into financial instability, it continued.
Sharp losses in sovereign bonds could weaken bank balance sheets, while at the same time constraining governments’ abilities to aid troubled banks, the group said.
An abrupt tightening of financial conditions could trigger forced selling by non-banks, option sellers and other investors very reliant on leverage, such as hedge funds and leveraged exchange-traded funds, which could lead to outsized losses, it also warned.
Hedge fund exposure to interest rate derivatives and sovereign bonds has more than doubled since 2020, rising to over $18 trillion by 2025, the IMF said.
“Vulnerabilities only get triggered when you have a shock, and the war in the Middle East is really the shock that is unfolding,” said Tobias Adrian, director of the IMF’s monetary and capital markets department, in an interview.
Private credit and AI
The IMF struck a cautious tone on the $3.5 trillion private credit sector, warning that signs of more borrower defaults could cascade into broader concerns about corporate credit overall, particularly in sectors that could be disrupted by artificial intelligence.
Signs of trouble in the obscure world of private lending, which had soared in popularity with companies looking for quick bespoke debt and investors seeking high returns, have been brewing since the middle of last year.
Blue Owl Capital , Ares Management, Apollo Global, Blackstone , and KKR have all limited redemptions from private credit funds as investor jitters mount.
The IMF said so far the turbulence appears to be limited and could have a “contained systemic impact,” but investors are accelerating the pace of redemptions amid fears of worsening credit quality. The IMF also warned that prolonged conflict in the Middle East could significantly slow AI investment, which has been a big driver of growth. While the overall impact to financial stability appears modest, such a pullback could weigh on firms within the AI ecosystem that are increasingly reliant on circular financing arrangements.
Policymakers should ensure they are prepared to address any market dysfunction by standing up and preparing liquidity and funding facilities, the IMF said. Monetary policy should focus on price stability and policymakers should closely monitor if actual inflation begins to spill over to inflation expectations.
On the fiscal side, policymakers should shift to tighten and get public debt on a stable path, and focus new spending on groups vulnerable to inflation shock, the IMF said.
