This report does not constitute a rating action.
DUBAI (S&P Global Ratings) April 15, 2024--S&P Global Ratings today said that Iran's unprecedented military action against Israel raises the risk of a sharp escalation in the conflict, which tests the limits of our base-case assumption underpinning sovereign ratings in the region (see "Sovereign Ratings List," published April 10, 2024).
While last weekend's events signal a significant increase in geopolitical risk, the central narrative of our base case remains broadly unchanged. That is, we expect the Israel-Hamas war to continue over 2024 and for Gaza to remain the epicenter, with continued pressure on Israel (AA-/Negative/A-1+) from Iran (unrated) and its proxies. We expect intensive diplomatic efforts, along with the limited (and widely anticipated) nature of Iran's operations, to prevent the immediate crisis from escalating to a full-scale regional conflict. Nevertheless, we believe the situation will be contingent on the nature and magnitude of the Israeli response over the next days. A full-scale conflict between states would be economically, socially, and politically destabilizing for the entire region and its financial markets.
We note that the main actors in the conflict and the wider diplomatic community have explicitly indicated they do not want the situation to escalate further. However, the risk of tactical miscalculations and other downside scenarios has increased. A sustained, unstable geopolitical backdrop characterized by periodic escalatory actions by warring parties is likely to remain a reality for the region. We could take negative rating actions should the war evolve with increasingly adverse macroeconomic implications on trade, financial flows, and tourism, in addition to the toll on the affected populations.
Our ratings on Middle Eastern sovereigns already factor in a certain level of regional geopolitical volatility. If a protracted and wider conflict emerges--along with, for example, an extended closure of the Strait of Hormuz--the fiscal benefit of potentially higher oil prices for Gulf oil-producing sovereigns could be offset by the governments being unable to export their hydrocarbons. This could increase their spending needs and negatively affect capital outflows, financing costs, and economic growth (see "How U.S.-Iran Tensions Might Affect Gulf Sovereign Ratings," published June 11, 2019).
In the adverse scenario of a wider prolonged conflict, our ratings on most regional sovereigns could come under pressure. That said, in the near term, we expect that the ratings on Abu Dhabi, Kuwait, Qatar, and Saudi Arabia would likely be cushioned by their large stocks of deployable government external assets. Oman's rapid deleveraging has strengthened the sovereign's balance sheet, and the country is less likely to be impeded by the closure of export routes given its geographic location. We view Bahrain as more vulnerable to outflows given its banking sector's high external financing needs. A further escalation could unsettle the social stability and security situation for Iraq, Lebanon, Jordan, and Egypt, particularly if reprisal attacks take place in those countries. However, the low rating levels of these sovereigns already incorporate a high degree of political risk and the deep-rooted challenges the countries face.
For Israel, Iran's direct attack constitutes a further escalation of already high geopolitical risks. Although the war with Hamas has been predominantly centered in Gaza since October 2023, its spillovers have been increasingly felt by Israel on other fronts, including the regular exchange of fire with Hezbollah in Lebanon, the Houthi attacks, and now the first direct attack by Iran that follows Israel's previous reported strike on Iran's consulate in Damascus. We consider that continued risks of a wider regional conflict could have an even more pronounced impact on Israel's economy, budgetary and security situation, compared with our existing base-line projections.
Supportive developments since the last round of regional tensions related to Iran in 2020 include a détente and restoration of diplomatic relations with Saudi Arabia. We note that the Hamas Oct. 7 attacks were partly motivated to raise Palestine up the international agenda and hinder further improvements in relations between Israel and the Gulf sovereigns, particularly Saudi Arabia (see "Israel's Agreements With Bahrain And The UAE Signal Shifting Alliances In The Middle East," published Sept. 17, 2020).
Related Research
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- Egypt Outlook Revised To Positive On Extensive External Support Program; 'B-/B' Ratings Affirmed, March 18, 2024
- Red Sea Attacks Intensify Egypt's Foreign-Currency Shortage, Jan. 25, 2024
- Red Sea Disruptions: Impact On Rated Qatari Entities Exposed To Oil And Gas, Jan. 25, 2024
- Sovereign Ratings List, April 10, 2024
- Regional Gas Is More Exposed Than Oil To War In The Middle East, Nov. 15, 2023
- Israel, Nov. 13, 2023
- MENA Tourism Likely To Take A Hit From Israel-Hamas War, Nov. 6, 2023
- Israel's Agreements With Bahrain And The UAE Signal Shifting Alliances In The Middle East, Sept. 17, 2020
- Rising Sovereign Event Risk In The Gulf Is Testing Our Base Case Of "No Direct Military Conflict", Jan 6, 2020
- GCC Banks To Maintain Stable Credit Fundamentals In 2020 Despite Event Risks, Says Report, Oct. 9, 2019
- Attack On Saudi Aramco Highlights Risks To Oil Capacity And The Sovereign's Geopolitical Vulnerabilities, Sept. 16, 2019
- How U.S.-Iran Tensions Might Affect Gulf Sovereign Ratings, June 11, 2019,
| Primary Credit Analyst: | Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com |
| Secondary Contacts: | Trevor Cullinan, Dubai + (971)43727113; trevor.cullinan@spglobal.com |
| Ravi Bhatia, London + 44 20 7176 7113; ravi.bhatia@spglobal.com | |
| Roberto H Sifon-arevalo, New York + 1 (212) 438 7358; roberto.sifon-arevalo@spglobal.com | |
| Maxim Rybnikov, London + 44 7824 478 225; maxim.rybnikov@spglobal.com |
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