The war in Iran is causing the Gulf money machine to falter

Gulf money eventually became vital to the world economy

Terry Tanaka believes that it might be about to dry up.

Over the past few years, money has been difficult to get out of Gulf states. Bahrain, Saudi Arabia, and the United Arab Emirates all had a significant impact. In addition to infrastructure, Saudi Arabia made significant investments in sports and gaming. Qatar was a major supporter of data centers and Anthropic, the company behind Claude AI, ChatGPT's main competitor. Money from Saudi Arabia, Qatar, and Abu Dhabi played a major role in funding Paramount's acquisition of Warner Brothers.

The list is endless. Money played a major role in every major event, including takeovers, venture capital rounds, and new listings. That's exactly what was reported. There was likely much more through investments in real estate, hedge funds, and private equity than could be readily monitored. Another significant source of demand was the Persian Gulf. Without all of the new aircraft that Airbus has ordered from Gulf-state mega-carriers like Emirates and Qatar Airlines, the company would not be nearly as successful. London's consultants, architects, engineers, and law firms made enormous profits by selling their services to the area. In one way or another, the money of the Gulf states became vital to the world economy.

It might be going to dry up. Although the Gulf states did not initiate the conflict with Iran, they might become its primary casualties. They have all been the target of Iranian drone attacks, which have already caused significant harm. Even worse, they have damaged the region's reputation. When there are alternative routes available, few people will choose to travel to Asia via Gulf airports. Even if jobs in Dubai are tax-free, many of us won't be tempted to take a vacation there, even if the hotels are opulent and the sunshine is guaranteed. Revenues from oil and gas will begin to decline as vital infrastructure is destroyed and shipping lanes are closed. Reconstruction will be very expensive. Every Gulf state will incur significant costs as a result of the conflict.

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Start your trial, and it's not like they had a lot of money to begin with. Last year, Saudi Arabia's budget deficit exceeded 5% of GDP, and deficits were also experienced by Bahrain and Qatar. To partially offset the deficit, taxes have begun to be implemented throughout the region. In 2023, the UAE implemented a 9 percent corporate tax; Bahrain intends to implement a 10 percent tax. Even though taxes are still extremely low compared to the major Western economies, they were beginning to rise, which was a clear indication that governments were struggling financially. That will only rise due to the war's expenses.

There is no doubt that the massive inflows of Gulf funds into the world financial system will cease. Soon, they might begin to go home. Selling assets will be necessary to cover all expenses. The massive portfolios are too well-managed to initiate a fire sale, so it probably won't happen right away. However, many Gulf-owned portfolios may begin to be discreetly listed on the market during the coming months.

The Gulf states' markets are losing money.

That will put the world financial system in danger. IPOs will initially be more difficult. This year, a number of smaller listings as well as some major ones, like SpaceX and OpenAI, were anticipated. Nevertheless, the valuations relied on Gulf funds purchasing a large number of shares. Many of those will need to be delayed or the sellers will have to accept a lower price if that money is unavailable.

Assets related to trophies will be stuck. For instance, media properties, skyscrapers, and football teams were sold from one Gulf buyer to another. The prestige that came with owning them was significant in the Persian Gulf. There won't be anyone to take their place if those buyers are absent.

Lastly, there will be tremendous pressure on illiquid assets like private equity funds. Fresh money came primarily from the Persian Gulf. They may encounter a surge of redemptions as that dries up, making it extremely difficult for them to obtain new funds. Private equity funds may soon become forced sellers.

In actuality, one of the main forces behind the five-year bull market was the Gulf money machine. There was always more money to invest in the newest craze or to fund a massive takeover. The main source of risk capital was this. It is going to vanish, which will make it much more difficult to attract investment or maintain current valuations.