The Petrodollar Collapse: How USD Shifts Are Crushing Middle East Debt Markets
June 2025 | Global Markets Report
In a seismic financial turn, the long-standing system of the petrodollar is unravelling — and the tremors are shaking the foundations of debt markets across the Middle East. As nations and investors recalibrate to a world moving away from oil-priced-in-dollars dominance, the aftershocks are being felt in bond yields, sovereign credit risks, and government borrowing costs across Gulf nations and beyond.
What Is the Petrodollar — and Why Its Collapse Matters Now
The term “petrodollar” refers to the U.S. dollars earned by oil-exporting countries through oil sales. Since the 1970s, global oil transactions have been largely denominated in USD, creating a powerful demand engine for the American currency. This system provided the U.S. with a unique economic advantage while cementing its influence in global trade and finance.
But now, with de-dollarization gaining momentum and the emergence of alternative trade arrangements — particularly between China, Russia, and Gulf countries — the petrodollar regime is crumbling. Nations are increasingly settling oil trades in Chinese yuan, euros, or even gold. The recent OPEC+ decisions and BRICS expansion have accelerated this decoupling.
For the Middle East, where debt issuance has long relied on stable USD inflows and favourable dollar-based borrowing conditions, the consequences are profound.
Gulf Borrowers Face a New Reality
Countries like Saudi Arabia, the UAE, Qatar, and Kuwait have historically enjoyed strong credit ratings and easy access to dollar-denominated debt markets. But as the petrodollar system weakens, they now face rising yields, currency mismatch risks, and a shift in investor sentiment.
In early 2025, Saudi Arabia cancelled a planned $5 billion bond issuance, citing “unfavourable market conditions.” Behind the scenes, analysts point to waning appetite for dollar-denominated Gulf bonds, especially amid growing concerns about the sustainability of public finances as oil revenues stagnate and capital outflows rise.
“The petrodollar collapse is tightening the screws on Gulf fiscal policy,” says a senior analyst at S&P Global. “Without steady dollar flows, these countries must either draw down reserves, devalue their currencies, or borrow at much higher costs.”
Sovereign Debt Under Pressure
The region’s sovereign debt markets have seen yields spike dramatically in the past 12 months. Here are the year-to-date trends:
- Saudi 10-year USD bonds: Yields rose from 3.8% to 5.9%
- UAE 10-year bonds: From 3.2% to 5.1%
- Oman 10-year bonds: From 5.5% to 7.8%, reflecting rising risk premia
- Egypt (heavily dollar-exposed): Facing a debt-to-GDP ratio nearing 100%, default fears loom
This sharp repricing reflects not only the shift away from the dollar but also growing fears that many Middle Eastern economies lack sufficient diversification to weather prolonged energy price volatility.
“The problem isn’t just about oil anymore,” says a Dubai-based economist. “It’s about the loss of financial leverage that came with dollar dominance. If Gulf nations can’t tap global capital easily and cheaply, their debt cycles become more fragile.”
The Role of De-Dollarization
China, India, and Russia — key energy importers — are leading the charge to bypass the U.S. dollar in oil and gas transactions. This shift, often dubbed “de-dollarization,” is disrupting traditional flows of petrodollars into global markets, particularly U.S. Treasuries and high-grade emerging market bonds.
For Middle Eastern economies, this means two things:
- Reduced demand for their dollar assets, leading to higher borrowing costs
- Less recycling of surpluses into dollar-based sovereign wealth funds, which historically stabilized budgets
Saudi Arabia’s Public Investment Fund (PIF), for instance, has scaled back U.S. asset purchases in Favor of investments in China, India, and Africa. But these alternative assets lack the liquidity and security of Treasuries, raising risk in fiscal portfolios.
Moreover, the UAE has recently signed multiple energy deals with India and China, settled in rupees and yuan, sidestepping the dollar. While this increases bilateral trade efficiency, it weakens long-standing dollar reserves that underpinned sovereign creditworthiness.
Corporate and Bank Debt in the Firing Line
It’s not just governments that are suffering. Corporations and banks across the Middle East are facing a funding crunch.
Many regional firms issued dollar-denominated bonds during the cheap liquidity years post-2008. Now, with the dollar more volatile and less in demand globally, refinancing is proving to be a nightmare.
In the last quarter:
- Over $11 billion in Gulf corporate bonds are up for renewal in 2025
- Spreads over U.S. Treasuries have widened by 250-300 basis points, making rollovers expensive
- Banking sector exposure to dollar liabilities is creating systemic stress, especially in Bahrain and Oman
This debt mismatch has become a red flag for credit agencies. Moody’s recently placed several Middle Eastern banks on negative watch, citing “external liquidity risks and declining foreign investor appetite.”
Central Bank Dilemmas and FX Risk
Another major headache: foreign exchange reserves. With fewer petrodollars flowing in, central banks in the region are depleting reserves to defend currency pegs and maintain import cover.
Saudi Arabia’s FX reserves fell to $385 billion in May 2025, down from $442 billion a year ago. For context, the kingdom needs at least $300 billion to maintain its riyal-dollar peg without resorting to austerity.
If dollar inflows continue to dry up, pegs may become unsustainable, triggering a cascade of regional currency devaluations. That, in turn, would inflate external debt obligations and crush confidence in local bond markets.
Real Economy Impacts
Beyond the numbers, the petrodollar collapse is starting to affect the real economy:
- Rising import costs due to FX strain are fuelling inflation
- Government project delays, especially in infrastructure and public works, are mounting
- Sovereign wealth funds are repatriating capital instead of investing abroad, squeezing global liquidity
Unemployment is inching up in the construction and energy services sectors across the Gulf. Meanwhile, subsidy cuts are likely to return, hitting consumer sentiment.
“The social contract in Gulf economies has always relied on oil-driven welfare,” says an academic at the American University of Beirut. “That contract is breaking under debt pressure and dollar scarcity.”
Geopolitical Shifts Accelerating Economic Risk
As the U.S. influence wanes and China deepens ties in the region, the geopolitical chessboard is shifting.
Beijing’s energy-for-infrastructure deals offer short-term relief, but they come with long-term dependencies. The GCC countries may find themselves navigating a fragile balance between old Western alliances and emerging Eastern blocs — all while their economic footing becomes less stable.
Additionally, Israel’s recent diplomatic rift with Saudi Arabia and Qatar’s growing alignment with China have further complicated investor risk assessments.
What Comes Next for Middle East Debt Markets?
While the long-term implications of the petrodollar collapse are still playing out, several trends are becoming clear:
- Higher cost of borrowing will be the new normal for Gulf states
- Diversification away from hydrocarbons is no longer optional — it’s urgent
- Regional capital markets must evolve, including local currency bond markets, to reduce USD dependence
- Financial transparency and institutional reforms will be critical to regaining investor trust
Experts warn that if policy inertia continues, the next five years could bring a wave of debt restructurings and even defaults across weaker economies in the region.
“Middle Eastern debt markets are at a crossroads,” says a JP Morgan strategist. “Adapt or collapse — those are the choices.”
The petrodollar collapse is more than a currency story. It’s a tectonic shift in global economic power, trade architecture, and financial stability. For the Middle East, the stakes are existential. Sovereign solvency, currency credibility, and political stability all now hang in the balance, tethered to a dollar that no longer rules alone.
As de-dollarization deepens, Middle Eastern debt markets must chart a new course. One that’s built not on the foundation of oil revenues priced in greenbacks, but on real diversification, resilient institutions, and a multi-polar financial future.
