Middle East and Central Asia has weathered global uncertainty with surprising resilience, avoiding the brunt of rising US tariffs and seeing only limited disruption from recent regional conflicts. Oil exporters benefitted from easing OPEC+ production cuts, while importers gained from low energy costs, strong remittances and booming tourism. The International Monetary Fund (IMF) World Economic Outlook (January 2026) projects gross domestic product (GDP) growth at 3.7% in 2025, up from 2.7% in 2024, rising further to 3.9% in 2026.

The gains are being driven largely by Gulf Cooperation Council (GCC) nations, particularly Saudi Arabia, where oil output rebounded faster than expected. Earlier OPEC+ cuts of around 2.2 million barrels per day, led by Saudi Arabia and Russia weighed on oil-exporting economies, but the gradual unwinding of these curbs is set to continue. Oil prices, which spiked briefly during the Israel-Iran conflict in June, averaged $68.9 in 2025 and are expected to ease to $67.3 by 2030. Trade pressures remain moderate as the end of a 90-day pause on US tariffs pushed effective rates for most regional economies to 10–15% by September 2025.

Despite relatively tight monetary policy, financial market conditions remain supportive. Sovereign spreads have narrowed, nominal exchange rates depreciated, and several countries successfully accessed international financial markets, signalling improving investor confidence. Inflation moderated but remained elevated at 10.9% in 2025, down from 14.0% in 2024, and is forecast to ease further to 9.5% in 2026, as falling food and energy prices in the Middle East offset high consumer prices in Central Asia.

Against this backdrop, banks in the region benefit from generally supportive operating conditions driven by economic growth, policy reforms and strong trade and investment. In Central Asia, improving regulation, stable asset quality and robust profitability strengthen banks, though exposure to geopolitical risks and Russia-linked economic flows remains a vulnerability. In the Middle East, economic diversification, resilient credit demand and continued government support underpin a stable banking outlook. While easing interest rates may weigh slightly on margins, strong loan growth, sound capital buffers and ample liquidity are expected to keep banks on a firm footing.

Economic growth to support credit demand and asset quality

Economic diversification efforts across the Middle East, alongside steady growth, is expected to lift credit demand and keep non-performing loans to near record lows. Governments in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates continue to implement business-friendly reforms and channel sovereign wealth funds into diversification initiatives. Real estate, tourism and construction are key beneficiaries. While geopolitical tensions and oil price volatility remain risks, economic expansion and lower interest rates should sustain strong credit demand.

Moody’s Ratings’ notes that non-performing loan (NPL) ratios are likely to remain close to historical lows, supported by borrowers’ improving debt-servicing capacity. The real estate and contracting sectors, traditionally the largest contributors to NPLs, are seen to perform well, except in Qatar where oversupply and payment delays continue to affect loans. Top of FormBottom of FormAmong major economies in the Middle East, growth is projected strongest in Saudi Arabia and the UAE. In Central Asia, Kazakhstan, the largest economy and a major oil exporter, is expected to have seen growth accelerate to 5.9% in 2025 from 4.8% in in 2024, before easing to 4.8 in 2026, underpinned by rising oil output and domestic demand.

Banks in Central Asia are positioned to expand as regional economies capture trade flows that bypass Russia following its reduced commercial ties with Western countries, while maintaining trade with Russia. Loan performance is expected to be supported by favourable economic conditions, though high interest rates in Kazakhstan pose risks. Both Kazakhstan and Uzbekistan continue to address previously unrecorded problem loans— incurred during the 2009 financial crisis and COVID-19 pandemic— with improved underwriting and closer asset monitoring to gradually strengthen asset quality.

Central banks in the Middle East are likely to align interest rate cuts with the US Federal Reserve as most currencies are pegged to the US dollar. Lower rates may modestly compress net interest margins (NIMs), but robust loan growth is expected to sustain profitability. In Central Asia, banks will continue to benefit from non-interest income and a shift towards higher-yielding SME and retail lending. Foreign exchange revenue from strong trade flows, remittances and foreign direct investment should partially offset margin pressures. Deposits will remain the primary funding source in the Middle East, reducing reliance on market funding. In Saudi Arabia, however, capital markets funding has increased as rapid loan growth outpaced deposit collection. Across the region, most banks are expected to maintain ample liquidity buffers, mitigating risks linked to reliance on a limited number of large depositors.

Fiscal environment presents a mix of opportunities and risks

While growth is strengthening, the region’s fiscal health remains uneven and heavily influenced by oil production adjustments, high debt burden in certain economies and the need for structural reforms.

Oil-exporters have bolstered revenues through higher prices and accelerated production, maintaining manageable deficits and advancing diversification. By contrast, oil importers face tighter fiscal space, elevated debt and limited buffers, even as robust remittances, tourism and low energy costs provide relief.

IMF projections indicate public debt rising over the medium term in Algeria, Bahrain and Iraq, while moderating in Egypt and Jordan. Rebuilding fiscal buffers in these economies would require “a credible process of fiscal consolidation while minimising burden on the most vulnerable populations.” Overall, governments are balancing short-term pressures with long-term stability through expenditure control, revenue diversification and targeted support to sustain growth while shielding economies from shocks.

The environment presents opportunities for banks, particularly in non-oil sectors benefitting from diversification. Banks seeking revenue beyond traditional lending can expand into digital banking, green finance and capital markets. Risks remain, particularly for institutions with large sovereign debt holdings in high-debt oil-importing countries. Regional conflicts and global trade tensions could increase market volatility, affecting corporate lending and investor confidence. Interest rate volatility may compress margins, while liquidity pressures could force banks to realise capital losses.

Global energy prices and shifting trade patterns influence external environment

The region navigates a delicate balance amid global energy swings, shifting trade routes and tightening financial conditions. Oil exporters in the GCC benefit from rising production as OPEC+ cuts unwind, while emerging markets and middle-income countries grapple with high debt and limited market access. Meanwhile, the region’s pivot to Asia is accelerating, with trade expected to hit $802 billion by 2030, making Asian economies its largest trading partners.

For banks, the picture is mixed. In stable markets such as the UAE and Saudi Arabia, institutions are set to sustain strong profitability and solid asset quality, underpinned by healthy liquidity and capital buffers. But risks linger. Oil-price swings, geopolitical tensions, and sudden market shocks could quickly reshape the financial landscape.

The pressure is sharper in countries with pegged exchange rates, where US interest rate moves flow directly into local lending and deposit costs. In more vulnerable economies, global slowdowns or persistent inflation threaten corporate and household balance sheets, raising credit risks. Policymakers and regulators are increasingly focused on rebuilding fiscal and external buffers to shield banks against these persistent global uncertainties.

Rapid AI adoption drives efficiency and financial inclusion

Banks are stepping up their use of AI and digital tools as governments back transformation efforts and customers demand faster, more inclusive services. The GCC is leading the shift, while Central Asia—particularly Kazakhstan—is seeing rapid uptake of digital banking and the expansion of super apps.

Digital channels, automation and data analytics are improving efficiency and cutting costs. Routine transactions are migrating to mobile and online platforms, reducing reliance on physical branches, while AI and robotic process automation streamline back-office tasks such as account opening and loan processing. Data-driven insights are also helping banks refine products and lower cost-to-serve ratios.

Technology is strengthening risk controls. AI-enabled systems monitor transactions in real time to detect fraud and money laundering, while advanced analytics and machine learning enhance credit scoring and lending decisions. RegTech solutions are automating compliance and data security, easing the burden of increasingly complex regulation.

Digital transformation is also widening financial inclusion. Mobile banking, super apps and digital wallets are extending formal financial services to underserved and remote communities, supported by faster, AI-enabled know-your-customer processes and the use of alternative data in credit assessments. Rising competition from digital players, alongside regional experiments with central bank digital currencies, is helping to push down transaction costs.

Beyond banking, surging AI demand is fuelling a global wave of data centre construction. Moody’s AI outlook for 2026 highlights accelerating investment in massive campus clusters of 1 to 5 gigawatts of capacity—comparable to a nuclear power plant—across the US, Middle East, Europe and parts of Asia.

Middle Eastern governments are emerging as key backers of global AI infrastructure, leveraging strong capital positions and abundant energy to support large-scale data centres and sovereign AI clouds. The UAE and Saudi Arabia are securing access to scarce computing capacity through partnerships with US hyperscalers, positioning the region as an alternative to power-constrained markets in the US and Europe.

Efforts to build technological sovereignty, however, come with tighter scrutiny of foreign partnerships to limit technology leakage, while fragmentation in global AI supply chains is adding complexity for companies operating across regions. Deeper AI adoption is also increasing exposure to cyber and governance risks, raising the bar for risk management.

Growth, technology and resilience

Banks in the Middle East and Central Asia enter 2026 with solid footing, supported by steady economic growth, policy reforms, and resilient trade flows. Oil exporters benefit from easing OPEC+ cuts and strong energy revenues, while importers leverage low energy costs, tourism, and remittances. These factors underpin robust credit demand, healthy asset quality, and ample liquidity, allowing banks to expand even as geopolitical tensions and fiscal pressures persist.

Digital transformation is also reshaping the sector, with AI, automation, and advanced analytics boosting efficiency, improving customer service, and expanding financial inclusion. Governments in the GCC and Central Asia are investing heavily in data infrastructure and sovereign AI initiatives, positioning the region as a rising technology hub. While these innovations offer growth opportunities, they also bring cybersecurity and governance challenges that banks must navigate carefully to sustain stability and competitiveness.

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