This report does not constitute a rating action.

The sharp escalation of the Israel-Iran conflict tests our existing moderate-stress scenario and incorporates a material proportion of our high-stress scenario. S&P Global Ratings believes risks on the downside have increased and notes the possibility of an even more severe scenario.

It's highly uncertain how the conflict will unfold. We now see a greater possibility of it affecting regional credit conditions. In our view, the main credit risk transmission channels are:

• Broader confidence factors and a "risk-off" setting that could hamper economic growth, funding costs, and banking system liquidity and asset quality.
• Energy prices, production, transportation (not just limited to hydrocarbons), and potential inflation.
• Weaker tourism and capital outflows.
• Security-related expenditure.

Our sovereign ratings in the region incorporate short-term increases in geopolitical stress. Supportive elements of our assessments remain in place, particularly the presence of large, liquid government asset buffers and a track-record of extending support to weaker governments. These should continue to provide substantial resilience. We note that the region’s capital and financial systems have remained remarkably resilient through all but the most severe geopolitical shocks.

We have in recent years identified geopolitical risk as one of the key downside risks for sovereign creditworthiness, with implications for the global economy. The escalation of the Israel-Iran conflict, since June 13, 2025, increases those risks by introducing an additional stress factor to the base case scenario that underpins most of our regional sovereign ratings.

Regional Risk Assessments Hinge On Several Factors

Table 1

Possible regional stress scenarios
Modest stress	Moderate stress	High stress	Severe stress
In this scenario, the intensification of direct, inter-state hostilities between Iran and Israel would remain short (less than three months). Attacks, including from proxy forces, on Israeli and allied regional assets are short-lived. Limited impact on credit metrics for the wider region.	In this scenario, a series of escalatory attacks between Israel and Iran threaten wider regional security but ultimately settle, in a time period somewhat beyond that in the modest stress scenario. Impacts on economic growth, energy prices, and key trade routes are manageable and temporary with limited impacts on fiscal and external credit metrics.	In this scenario, persistent and intense cycles of attacks between Israel and Iran develop, implying a material impact on macroeconomic stability for the wider region. This includes more prolonged blockages to trade routes, which could engender a response from non-regional actors, and a greater stress on transmission channels such as energy prices, security expenditure, tourism flows, and capital outflows.	In this scenario, regional and non-regional allies are drawn into the conflict, including Iran and its supported forces, the U.S., and Gulf allies. This results in material increases in energy prices and risks to export volumes because of persistent threats to trade routes; lasting impacts on regional macroeconomic stability; and greater stresses on sovereigns' fiscal and external metrics.
Source: S&P Global Ratings.

In updating our regional risk assessment, we consider the following factors most pertinent:

Israel says its stated aim of destroying Iran's nuclear capability could take at least two weeks, maybe longer . This points to a more sustained Israeli campaign than experienced during the retaliatory attacks of 2024. The latest operations hit a wide range of targets in Iran, including missile storage facilities, gas fields, air defense systems, airports, public buildings, and key regime-related individuals.

Iran's response has been more expansive and more effective in hitting Israeli targets than the strikes of October 2024 . The conflict so far appears limited to the two countries, with attacks and counter attacks seeking to avoid drawing in third countries, such as the U.S. and Gulf countries. If Iran follows through on threats to widen its retaliation it could provoke a response from the U.S. and others in the region, raising risks further.

Israel has also attacked energy facilities in Iran, including a processing plant at the largest gas field in the world, the South Pars field, and a refinery in Abadan . If Israel targets more oil production facilities, it could disrupt global oil sector dynamics. Iran accounts for 3% of the world's oil output and about 7% of gas production.

The likelihood of a diplomatic solution appears increasingly distant . Iran-U.S. talks scheduled to resume on June 15 were cancelled following the Israeli attacks.

Iran's leadership is likely to feel increasingly threatened as strikes continue, particularly if the U.S. administration increases its direct support for Israel's actions . This could raise the risk of prolonged trade route disruptions by Iran or its proxies. Conversely, an attack on U.S. military assets in the region is less likely, in our view, given that the subsequent response from the U.S. would likely be severe for the Iranian regime.

Proxy forces, such as the Houthis in Yemen, could disrupt trade routes and oil infrastructure . Media and intelligence reports suggest some proxies have weakened. However, the threat from Houthi forces has suppressed maritime activity in the Red Sea and forces allied to Iran are active in Iraq (where U.S. assets have previously been attacked) and Syria. Media reports suggest that tanker activity through the Strait of Hormuz is decreasing, on the potential threat of Iranian activity.

A longer, more intense conflict increases the potential for military miscalculations .

Same Credit Risks, Different Country Impacts

Our sovereign ratings in the region factor in short-term increases in geopolitical stress but the transmission channels we identify could affect countries in the region in different ways. Some sovereigns are more sensitive to certain stresses than others, so parts of our scenarios may apply to some countries but not others. The geography of the region matters and may partly determine the potential impact. As a result, some GCC sovereigns are more vulnerable to a prolonged and persistent disruption in the Strait of Hormuz than others.

Gulf Cooperation Council (GCC) states have sought to diversify activity away from hydrocarbons and this has started to reduce related vulnerabilities. For now, oil and gas receipts remain the largest component of fiscal and current account revenues. Consequently, oil sector dynamics continue to underpin much of the non-oil activity through public investment, consumer confidence, and asset valuations.

Blockages of the Strait of Hormuz or Bab Al Mendab--or a perception that they could be blocked--could reduce traffic, curb oil exports, and increase shipping and insurance costs. Any blockage could also disrupt regional cargo flows, particularly through Jebel Ali port in Dubai--a key hub in regional supply chains.

Table 2

Regional sovereign credit considerations
	Rating	Key sovereign credit considerations	Key physical asset vulnerabilities (Source: S&P Global Market Intelligence)	2025F Net GG debt/GDP*	2025F Net external debt*	2025F External financing needs*
Iraq	B-/Stable/B	Most of Iraq's oil is exported via the southern port of Basra, which then passes through the Strait of Hormuz. Iraq is very exposed to security risks given the potential for Iran-backed militias in the country to launch attacks at Israel or U.S. bases in the Gulf. Heightened regional tensions will pressure the fiscal position, but its foreign exchange reserves exceed $100 billion and offer some cushion.	U.S. military Bases	38	-75	50
Egypt	B-/Stable/B	Egypt is a net energy importer, including from Israel, and increases to its oil or gas bill--or disruption of its supply--could have an impact on fiscal and external metrics. Houthi missiles targeting shipping in the Strait of Hormuz could also further affect Suez Canal receipts. However, access to the Mediterranean Sea helps the country help if there is any blockages.	Commercial shipping (Suez Canal)	72	111	150
Bahrain	B+/Negative/B	In comparison the the rest of the GCC, Bahrain's oil production is small and its economic base relatively diversified. However, it remains one of the most fiscally dependent on oil receipts and is highly indebted. Bahrain has benefited from support from the rest of the GCC in the past and our rating incorporates future assistance if needed. Bahrain hosts the U.S. Navy's Fifth Fleet.	U.S. military bases, critical infrastructure, commercial shipping	127	-16	357
Jordan	BB-/Stable/B	Jordan's external ratios are sensitive to tourism revenue as it accounts for nearly one-third of CARs. Jordan is a net importer of oil and is sensitive to increases in oil prices. About 40% of Jordan's exports go to the rest of the Middle East, exposing them to regional trade route disruption.	U.S. military bases	84	49	154
Oman	BBB-/Stable/A-3	Oman's export facilities in Sohar, on the Gulf of Oman or Duqm, on the Arabian Sea coast, avoid the Strait of Hormuz entirely and therefore we view Oman as less exposed to the risk of its blockage. Its container facilities could be used as an alternative to Gulf ports and help regional trade routes, which could benefit its external accounts and potentially boost growth. While the authorities have been successful in improving the country's resilience to oil price volatility, the government's balance sheet is not as resilient as other GCC peers.	Critical Infrastructure	-8	14	110
Israel	A/Negative/A-1	Israel's wealthy economy has historically been resilient not least due its sizable high-tech services sector (some 20% of GDP and over 50% of exports), with a high percentage of employees able to work from home. This should somewhat cushion the impact of security disruptions. The development of offshore gas fields transformed Israel into a net exporter of natural gas in recent years. Tourism accounts for just 2%-3% of total exports. Israel's foreign exchange reserves stand at $229 billion (40% of GDP), covering 1.7x the gross external debt of the whole economy. The elevated security spending weighs on public finances. Israel's small size and high population density suggest the socioeconomic and fiscal fallout from physical damage to infrastructure could be sizable.	Military, nuclear, critical infrastructure	67	-80	58
Kuwait	A+/Stable/A-1	Kuwait depends on the Strait of Hormuz as an export route and the concentration of oil in fiscal and external revenues is among the highest in the region. Consequently, its fiscal and external flows are highly sensitive to changes in the oil price. Still, the government has amassed one of the largest asset stocks globally, which provides a significant buffer against shocks. It hosts a large U.S. army base at Al Arifjan.	U.S, military bases, critical infrastructure, commercial shipping	-495	-900	107
Saudi Arabia	A+/Stable/A-1	The Kingdom of Saudi Arabia exports about 6.5mbpd, roughly 80% of which is exported through the Strait of Hormuz. We understand the East-West pipeline system has additional capacity of 3.3mbpd and a total capacity of 5mbpd. This facility could potentially be material in maintaining export earnings. The kingdom is driving an expensive economic transformation program, which is starting to reduce its dependence on hydrocarbons. Related expenditures are high and fiscal deficits elevated as a result. However, the government's net asset position provides substantial credit resilience.	U.S. nilitary bases, critical infrastructure	-49	-60	78
Qatar	AA/Stable/A-1+	Qatar depends on the Strait of Hormuz as an export route, although it does export gas to the UAE through pipeline. It shares the North Field, where it sources its natural gas, with Iran. As a result, we understand diplomatic relations are potentially less strained. However, Qatar also hosts the Al Udeid Air Base, which we understand is the largest U.S. military base in the region and its regional central command. Qatar's government balance sheet is very strong and it offers significant protection against potential capital outflows, which have happened in the past. Although covered by substantial assets, we view Qatar's external debt, emananting from its financial system, as high and as a source of risk.	U.S. military bases, critical infrastructure, commercial shipping	-128	-121	188
Abu Dhabi*	AA/Stable/A-1+	We understand that the Abu Dhabi Crude Oil Pipeline to Fujairah has the capacity to deliver about 50% of the emirate's oil exports directly to the Fujairah terminal on the Indian ocean, bypassing the Strait of Hormuz. It hosts the U.S. Al Dhafra Air Base. Abu Dhabi has built up one of the highest fiscal buffers among our rated sovereigns and it operates a controlled fiscal policy.	U.S. military bases, critical infrastructure, commercial shipping	-325	-200	139
CAR--Current account receipts. GCC--Gulf Cooperation Council. Mbpd--Million barrels per day. *Net general government debt/GDP--A negative figure indicates a net asset position, where liquid government assest are larger than debt. Narrow net external debt/current account--Receipts or payments (if in a net external asset position) is our primary indicator for a country's external indebtedness. See Sovereign Rating Methodology for full definition. Gross external financing needs--our key measure of a country's external liquidity. It is the ratio of gross external financing needs to the sum of CAR plus usable official foreign exchange reserves For Abu Dhabi's external data, we use UAE values. Source: S&P Global Ratings.

Oil Gains Depend On Output, Demand, And Open Trade Routes

Higher oil prices will only benefit the region if production continues, global demand is sustained and if trade routes are kept open.

Powerful factors have disrupted oil market supply and demand dynamics over 2025, and we believe similar conditions will likely persist. In our sovereign analysis, we assume prices will be volatile as ongoing conflicts continue, while at the same time U.S. trade tariffs create policy uncertainty and OPEC+ accelerates its additional production. Following Israel's June 13 attack on Iran, prices initially jumped by more than they fell on.

Each of these factors alone has the potential to re-establish a new price level.

Our ratings incorporate the potential for price volatility. Key to our assessment is our medium-term average price expectations. Absent the uncertain impacts of the conflict on supply and prices, we currently assume that oversupply in the oil market will continue to outweigh slow demand growth through 2025 and beyond. We will keep this assumption under review as market dynamics evolve.

Our Negative Outlook On Our Rating For Israel Reflects Vulnerability To Geopolitical, Security Risks

The negative outlook on our 'A' long-term sovereign credit rating on Israel reflects the risk that the escalation of military conflict could substantially weaken Israel's economy and fiscal and balance-of-payments positions.

An escalation could include shocks to foreign and domestic investor confidence, capital flight, and financial market and exchange-rate volatility. It could add to direct physical damage to infrastructure and associated risks to growth and public finances. It is difficult to quantify the scope of such effects at this stage.

The structure of the Israeli economy should somewhat cushion the impact of security disruptions. The economy is centered on high-tech services exports, with a high proportion of employees able to work from home.

In previous stress episodes the heightened security environment has had only limited impact on the behavior of Israel residents, with no evidence of bank deposit instability or conversion to foreign exchange. Protracted military activity of high intensity could change this.

Higher Risk Scenarios For Regional Sovereigns Will Affect Banks' Creditworthiness

We see a high risk of escalatory attacks between Israel and Iran that will likely hit business confidence in the GCC region. In our base-case scenario, the risk of a protracted, broader regional conflict is probably less likely at this stage.

We have identified three channels of risk transmission for the GCC banking systems:

• Outflows of foreign funding, with non-resident investors potentially exiting the GCC region as confrontation intensifies.
• Outflows of local funding, although we assume that this would materialize only in the case of a broader regional conflict or in our severe stress scenario.
• A spike in default rates among banks' corporate and retail clients as the geopolitical instability affects regional economies particularly if it disrupts oil exports.

To quantify the risk and to stress test banks' existing balance sheet positions, we use data on local and external funding published by central banks as of Dec. 31, 2024, and data reported by the top 45 banks in the GCC region.

We examine the impact of external funding outflows under various assumptions (see table 3). We assume significant external funding outflows, particularly for what we would consider as volatile liabilities such as non-resident interbank deposits. We also assume banks will liquidate their external assets, with some haircuts to face these outflows.

Finally, we assume that material external funding outflows are triggered under the high and severe stress scenarios.

Table 3

External funding outflows assumptions
​	Cash​	Due from banks​	Due from ​branches abroad​	Investments​	Loans to nonresidents​	Other assets​
Asset haircuts​	0%​	10%​	20%​	20%​	100%​	100%​
​	Nonresident deposits​	Due to nonresident banks​	Due to head office ​and branches​	Debt​	Other outflows​
Outflows​	30%​	50%​	20%​	10%​	0%​

Source: S&P Global Ratings.

For the local private sector deposit outflows, we assume that these would happen only under the severe stress scenario. Local private sector deposit outflows would imply expats and residents leaving and hence the reason it is less likely. We calibrate the stress at 20% outflows of private sector deposits, which is based on historical data from the 1990-1991 Gulf War.

We assume no outflows of government or other public sector deposits. In fact, in previous episodes of heightened geopolitical risk, the government and its related entities intervened to support banks to face capital outflows.

Finally, for asset quality indicators, we calibrate our stress assumptions (see table 4) based on previous shocks. For example, during the global financial crisis, the average nonperforming loan ratio of rated GCC banks reached about 6%.

Table 4

Asset quality deterioration assumptions
​	High Stress	Severe Stress
NPLs​	NPLs stock increase by 30%, with the minimum at 5%​	NPLs stock increase by 50%, with the minimum at 7%​
Coverage​	Allocation of excess provision and 100% coverage​	Allocation of excess provision and 100% coverage​

NPL--Nonperforming loans. Source: S&P Global Ratings.

Government Support Will Help Contain Projected Outflows

Under our hypothetical stress assumptions, external funding outflows could reach about $240 billion, which is equivalent to about 30% of the cumulative external liabilities of tested systems. That said, we think banks have sufficient external liquidity to cover these outflows in most cases, assuming they can liquidate their external assets.

Qatar is the only country where banks could require some support for a very manageable estimated amount of $9 billion under our hypothetical stress assumptions. That's because Qatari banks have the highest net external debt among the six GCC countries. At year-end 2024, Qatari banks net external debt reached 31.8% of the system's total loans.

In our view, the risk of outflows is mitigated by the strong likelihood of government support in case of need, as we saw during the boycott of Qatar in 2017. During that time, the banking system lost about $20 billion of external funding and received around twice that amount in form of additional deposits from the government and its related entities.

In Saudi Arabia , the banks actual position appears satisfactory. However, if they are unable to continue to mobilize external funding, their capacity to continue financing Vision 2030 projects may weaken.

Finally,  United Arab Emirates banks have the strongest net external asset position in the region and therefore show the highest resilience to our hypothetical capital outflows.

In terms of local deposit outflows, under our severe stress scenario, banks could also experience about $290 billion in deposit outflows from local private sector deposits. We think banks can cope with this. And if their assets are less liquid than we assume, they will receive support from central banks.

Finally, factoring in our asset quality deterioration assumptions means that 16 of the top 45 banks in the GCC region will likely display cumulative losses of just over $5 billion under the high stress scenario, based on banks' annualized reported net income as of Dec. 31, 2024. This represents 3% of affected banks' total equity at year end 2024.

This number increases to 26 for the severe stress scenario, with cumulative losses reaching about $30 billion--10% of affected banks total equity at year end 2024.

Under both scenarios, the average Tier-1 capital ratio for the banks showing losses will likely remain at about 15%. These amounts indicate that the hypothetical shock is likely to be a profitability event rather than a solvency one. That's because GCC banks' business models and profitability remain sound, with average returns on assets of 1.7% at year-end 2024.

In addition, banks display strong capitalization, with an average Tier 1 capital ratio of 17.2% on the same date, which could help them cope with a stronger stress that we expect.

Further Escalation Will Test Regional Resilience

Our stress test scenarios indicate that regional banks are starting from a strong position and have a high degree of balance sheet resilience. On the flipside, a complex, unpredictable, and protracted regional conflict, would likely have adverse implications for the creditworthiness of regional banks.

Editor: Lex Hall

Related Research

• MENA Regional Conflict - Country Risk | Strategic Report--Connect, June 13, 2025
• Global Sovereign Rating Trends 2025: Geopolitical Risk Is The Biggest Threat To Credit Quality, Dec. 18, 2024
• What Would An Escalation Of The War In The Middle East Mean For GCC Banks?, Oct. 21, 2024
• Widening Middle East Conflict Poses Risks For Regional Sovereign Ratings, Oct. 9, 2024
• A Prolonged Israel-Hezbollah Conflict Bears Long-Term Socioeconomic And Security Risks For Lebanon, Oct. 3, 2024
• Israel Long-Term Ratings Lowered To 'A' From 'A+' On Heightened Security Risk; Outlook Negative, Oct. 1, 2024
• Saudi Arabia Outlook Revised To Positive On Sustained Reform Momentum; 'A/A-1' Ratings Affirmed, Sept. 13, 2024
• Jordan Upgraded To 'BB-' On Economic Resilience; Outlook Stable, Sept. 6, 2024
• Israel Long-Term Ratings Lowered To 'A+' From 'AA-' On Heightened Geopolitical Risk; Outlook Negative, April 18, 2024
• What A Regional Escalation Could Mean For MENA Banks' External Funding, Nov. 13, 2023
• MENA Tourism Likely To Take A Hit From Israel-Hamas War, Nov. 6, 2023
• GCC Sovereign External Balance Sheets Remain Strong Despite Higher Banking Sector External Debt, Nov. 13, 2023
• Israel Outlook Revised To Negative On Geopolitical Risks; 'AA-' Ratings Affirmed, Oct. 24, 2023
• War In The Middle East Compounds Global Geopolitical Risks, Oct. 18, 2023
• Why GCC Banking Systems Are Resilient To Geopolitical Stress Scenarios, June 22, 2022

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	Dhruv Roy, Dubai 971-0-56-413-3480; dhruv.roy@spglobal.com
	Karen Vartapetov, PhD, Frankfurt 49-693-399-9225; karen.vartapetov@spglobal.com
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