The US-Iran conflict and the disruption of shipping through the Strait of Hormuz have represented one of the most significant external shocks to Kuwait’s economy in decades.

Given Kuwait’s heavy reliance on hydrocarbon exports and its dependence on the Strait as its primary export route, the country appeared particularly vulnerable to a prolonged disruption in regional trade and energy flows. 

Yet despite the severity of the shock, Kuwait has weathered the crisis reasonably well thanks to strong sovereign buffers, effective policy intervention, and regional cooperation.

Strong foundations

Kuwait benefits from one of the world’s strongest sovereign balance sheets, supported by significant oil reserves and substantial assets managed by the Kuwait Investment Authority. These buffers have repeatedly been cited by international institutions and rating agencies as key pillars of the country’s economic stability. 

Kuwait’s resilience is rooted in its experience of overcoming previous crises. The country successfully recovered from the 1990 Iraqi invasion, weathered the Global Financial Crisis, and managed the economic fallout from the Covid-19 pandemic.

Economic impact

The conflict nevertheless imposed significant economic costs. The closure of the Strait of Hormuz sharply disrupted oil exports, causing production shut-ins and weighing heavily on government revenues. Economic activity weakened across several sectors, reversing what had previously been a period of improving momentum supported by strong credit growth, rising real estate activity, increasing project awards and solid non-oil growth. 

Business conditions deteriorated during the conflict, with Kuwait’s PMI falling into contraction territory as shipping disruptions, flight restrictions, and weaker demand affected both output and order books. 

However, the overall impact proved less severe than feared. Kuwait benefited from regional cooperation and logistical adaptability. Alternative arrangements were developed to partially overcome disruptions to shipping and airspace, while cooperation with GCC partners helped preserve energy trade flows. 

Kuwait continued supplying refined petroleum products to neighbouring Gulf markets, and discussions emerged regarding Saudi support in facilitating crude exports. Although these measures could not fully substitute for normal export routes, they reduced the economic damage and highlighted the value of regional integration during periods of stress. 

Inflation also remained relatively contained, thanks in part to subsidies and price controls. While supply-chain disruptions and higher transportation costs pushed prices upward, the inflationary spike was moderate and appears to have been short-lived, with inflation easing to a 4-month low of 2.2% in June. 

Adequate inventories and government support via subsidies and price controls helped limit the pass-through of higher import costs to consumers. 

Additionally, the Central Bank of Kuwait implemented a package of regulatory measures to preserve liquidity, confidence and maintain credit flows, while public sector deposits at banks jumped between February and May as the government utilised its balance sheet to support the financial system.

More recently, an emergency response fund has further reinforced recovery efforts. These measures helped prevent a temporary geopolitical shock from developing into a broader financial crisis.

Market confidence 

Throughout the conflict, major rating agencies reaffirmed the country’s sovereign ratings, citing its exceptional fiscal and external buffers. S&P maintained Kuwait’s AA-/A-1+ rating with a stable outlook, Moody’s reaffirmed its A1 rating, and Fitch continued to highlight Kuwait’s exceptionally strong sovereign balance sheet and external asset position. 

These assessments reflected confidence that Kuwait possessed sufficient resources to absorb even severe disruptions to oil exports and trade flows.

Furthermore, investor confidence was confirmed in July when Kuwait raised $6bn through a three-tranche international bond sale despite ongoing geopolitical tensions. The transaction attracted approximately $14.8bn in investor orders, allowing pricing to tighten by 25 basis points from initial guidance. Yield spreads relative to US treasuries were wider than before, reflecting a slightly higher geopolitical risk premium. 

However, the strong oversubscription highlighted Kuwait’s good creditworthiness and the ability to maintain market access even during periods of heightened regional uncertainty. Even after this issue, the public debt-to-GDP ratio stood at only 24%, still very low by international standards.

The conflict offers important lessons for strengthening resilience in the future. The disruption of the Strait of Hormuz reinforced the need to diversify export routes and reduce reliance on a single maritime corridor. Potential measures include exploring alternative pipeline infrastructure, raising crude and refined-product storage capacity abroad and strengthening regional integration.

Kuwait could even consider increasing overseas oil and gas investments to diversify geographical exposure and ensure a more stable stream of hydrocarbon income during periods of regional disruption. 

The conflict also adds urgency to fiscal and structural reform efforts. Although Kuwait’s exceptional financial reserves provide a strong cushion against temporary shocks, the crisis once again highlighted the economy’s dependence on volatile oil revenues.

Looking forward, the focus should be on lasting structural reforms to grow and diversify the non-oil private sector, improve the business environment, and promote fiscal sustainability. This will strengthen the economy’s ability to withstand future geopolitical shocks. 

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