Daily Update: Prolonged Middle East Conflict Puts Sovereigns Under Pressure
Today is Tuesday, October 15, 2024, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global .?Subscribe?to be notified of each new?Daily?Update.?
The conflict in the Middle East is already affecting sovereign ratings. According to analysts at S&P Global Ratings, Israel has been downgraded two notches since Oct. 7, 2023, reflecting weaker fiscal and growth prospects for an economy on a war footing. Lebanon, meanwhile, remains in default , and its economic and recovery prospects have been weakened by Israeli military actions in southern Lebanon and Beirut. The question is whether a broader regional war involving Iran or other parties might lead to further sovereign downgrades. S&P Global Ratings examined the circumstances that could trigger this in “Widening Middle East Conflict Poses Risks For Regional Sovereign Ratings .”
Israel’s military has shifted focus in the last few months, engaging in fewer military actions in Gaza and looking instead at Hezbollah in southern Lebanon. As Israel targets nonstate Iranian allies such as Hezbollah and Houthi rebels in Yemen, Iran has begun to respond militarily, notably with the Oct. 1 missile attack on Israel.?
S&P Global Ratings has four possible regional stress scenarios for the conflict: modest, moderate, high and severe. Under the modest stress scenario, interstate hostilities between Iran and Israel would have a duration of less than three months, and Israel’s actions in southern Lebanon would reduce Hezbollah attacks. Under moderate stress, retaliatory attacks between Israel and Iran would affect economic growth, energy prices and key trade routes briefly and remain manageable. Under a high stress scenario, the conflict between Iran and Israel would intensify, affecting energy prices, security expenditure, tourism flows and capital outflows, with blockades of trade routes possible. Finally, under a severe stress scenario, allies would be drawn into the conflict, with lasting impacts on energy prices, economic stability and fiscal health.
A lack of direct conflict between Israel and Iran does not necessarily indicate modest or moderate stress. Should Iranian proxy military forces in Iraq, Syria and Yemen step up their disruptions of trade routes , the conflict could rapidly escalate. The Strait of Hormuz is the central trade route for about 25% of daily global oil production, and attacks on oil facilities in the region could affect energy prices globally. For example, the 2019 attacks on an Abqaiq plant in Saudi Arabia temporarily cut off about 50% of Saudi oil production and led to some of the biggest price spikes in three decades.
S&P Global Ratings believes that the risks of material economic disruption have increased for Israel and Lebanon and that lingering aftereffects are more likely to persist into 2025. Geopolitical turbulence is already factored into sovereign credit ratings, but a wider conflict in the Middle East could precipitate further downward rating pressure.
Today is?Tuesday, October 15, 2024, and here is today’s essential intelligence.
Written by Nathan Hunt.
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