The escalating conflict involving Iran, Israel and the United States is emerging as a major test for the Gulf’s sovereign wealth funds, which collectively manage around $5 trillion in global assets. Created to preserve and grow oil wealth and provide financial stability during crises, these funds may now be called upon to cushion regional economies against a potential geopolitical and economic shock.
Recent Iranian attacks across the Gulf have intensified concerns about disruption to energy production and exports. Oil prices have surged sharply in response to the conflict, but the strategic Strait of Hormuz — through which about a fifth of the world’s oil passes — has faced severe disruption. The near-closure of the strait has affected key energy infrastructure, including major refining and liquefied natural gas facilities in Saudi Arabia and Qatar.
The situation presents a paradox for Gulf economies. While higher oil prices usually boost revenues, prolonged disruption to exports could undermine government finances and economic activity. Most Gulf states still rely heavily on hydrocarbon revenues to support public spending, even as they pursue diversification strategies.
Fiscal positions across the region are uneven. The United Arab Emirates is expected to maintain a fiscal surplus over the next two years, while Saudi Arabia has already been running significant deficits amid heavy spending tied to its economic transformation agenda. Rising defence costs, supply disruptions and slower economic activity could add further pressure to government budgets if the conflict persists.
Economic growth projections have already been revised downward. Analysts expect the Gulf’s non-oil sectors to slow as geopolitical risk affects investment, tourism and broader business sentiment. The diversification agenda — which depends on attracting foreign capital, global talent and large-scale private investment — could face additional headwinds.
In such a scenario, sovereign wealth funds may become a key financial buffer. Governments could draw on these funds to stabilise domestic economies, support critical sectors and manage emergency spending needs. However, tapping sovereign wealth funds also carries implications for their long-term investment strategies.
Over the past decade, Gulf funds have increasingly positioned themselves as influential global investors, directing vast amounts of capital into technology, artificial intelligence, infrastructure, sports, media and entertainment. These investments have been central to efforts to build post-oil economic ecosystems and expand geopolitical influence through economic partnerships.
A prolonged conflict could force a strategic shift toward domestic priorities. Funds that have played a major role in financing national development plans — particularly Saudi Arabia’s Public Investment Fund — may face tighter financial conditions if governments require additional support.
The ability of these funds to mobilise capital varies widely depending on how their portfolios are structured. Some hold large amounts of liquid assets such as listed equities and government bonds, which can be sold relatively quickly if needed. Others have a heavier exposure to private equity, infrastructure and long-term investments that are harder to liquidate.
Public markets would likely be the first source of liquidity if governments needed to raise funds quickly. However, large-scale sales of visible assets could affect market sentiment and potentially reduce investment returns during volatile periods.
Despite the heightened geopolitical tensions, analysts expect a gradual portfolio adjustment rather than a sudden wave of asset sales. Sovereign funds are long-term investors, and most are designed to withstand short-term market shocks. A slowdown in outbound investments and a cautious rebalancing of portfolios appears more likely than emergency liquidation.
Historical precedents illustrate the stabilising role sovereign wealth funds can play during crises. Kuwait’s sovereign fund, the world’s oldest, helped sustain the country’s government in exile during the Iraqi invasion in 1990. More recently, Qatar used sovereign capital to stabilise its banking sector during the global financial crisis.
These examples underline the core purpose of Gulf sovereign wealth funds: to accumulate capital during periods of surplus and deploy it when national stability is threatened.
If the current conflict escalates further, Gulf governments may once again rely on these financial reserves. The coming months could therefore determine whether the region’s sovereign wealth funds remain primarily global investors — or shift toward acting as domestic economic shock absorbers.