Moody’s, the credit rating agency, has warned of a potential for a significant deterioration in credit quality for countries across the Middle East if the recent conflict between Israel and Iran escalates.
The report highlights the risk of a ‘tit-for-tat’ exchange between the two nations developing into a full-blown military conflict, which could cause widespread damage.
While Moody’s baseline scenario assumes a continuation of limited exchanges, it acknowledges the possibility of a more severe outcome. This could have serious consequences for Israel’s creditworthiness, as increased defence spending would strain public finances.
The report also explores the potential impact on other regional states. If key infrastructure targets were struck, countries like Egypt and Jordan could face disruption to their gas supplies.
Furthermore, a wider conflict would likely damage tourism and investment across the region, with economies like those of Lebanon, Qatar and the UAE likely to be particularly affected.
Moody’s also warns that lower-rated countries with high refinancing needs, such as Bahrain and Egypt, would be most vulnerable to a risk-off environment triggered by the conflict.
The report acknowledges the unlikelihood of a complete closure of the Strait of Hormuz, a vital shipping lane. However, it highlights the potential disruption to oil exports faced by Bahrain and Iraq if this were to occur.
The impact on oil prices is also a key concern, with potential negative consequences for both oil exporters and importers depending on the severity and duration of any price rises.
Moody’s concludes by underlining the potential disruption to trade flows for many countries in the region if the Strait of Hormuz were to be affected. This could lead to slower economic growth and higher inflation.
This could weaken domestic economic activity and raise inflation. An inability to import materials would likely slow or halt construction activity and the implementation of large economic diversification projects. The UAE is additionally exposed as Dubai’s Jebel Ali port is the region’s main transshipment hub.
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