Iran crisis has rapidly escalated event risks in Gulf, says S&P

S&P Global Ratings has said that the killing of Iranian general Qassem Soleimani by the US over the weekend and its ongoing fallout has rapidly escalated event risk in the Gulf region.

The global ratings agency said that the rising sovereign event risk in the Gulf is testing its basecase of ‘no direct military conflict’. For now, this development does not alter our base-case assumption that any military action by either side will not lead to a fully fledged direct military confrontation, S&P Global Ratings said in a statement.

‘We continue to believe that any escalation will remain contained given that a direct conflict would be economically, socially, and politically destabilising for the entire region, including USGulf allies. We consider that a potential intensification of proxy conflicts will further undermine confidence and investment in the region,’ the ratings agency said.

According to S&P Global Ratings, its ratings on Gulf sovereigns already take into account a certain level of regional geopolitical volatility.

‘If a protracted and wider conflict emerges, assuming export routes remain functional, the fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and weaker economic growth, in our view.’

In such a scenario, S&P said, Abu Dhabi, Kuwait, Qatar, and Saudi Arabia would likely be better cushioned by their large stocks of deployable government external assets. ‘On a flow basis, we view Bahrain and Qatar as more vulnerable to outflows given their high external financing needs, relating to their respective banking sectors. Oman’s reliance on external debt is a key contributor to our negative outlook on the ‘BB/B’ sovereign rating; a higher risk premium in the event of escalating conflict could further pressure already-rising debt-servicing costs,’ the ratings agency said.

Meanwhile, oil prices on Tuesday fell from a three-month high as traders waited to see whether the tensions between the US and Iran would lead to a disruption in Middle East crude supplies. Brent crude futures retreated toward US$68 a barrel after a two-day surge following the US airstrike that killed Soleimani pushed prices above US$70 for the first time since September. Brent oil dropped 0.8 per cent to US$68.36 a barrel on Tuesday at the ICE Futures Europe exchange as of 1:33pm in London, according to a Bloomberg report. Brent ended Monday just 0.5 per cent higher after earlier rising as much as 3.1 per cent in intraday trade.

A further escalation, S&P added, could be especially destabilising for Iraq’s security situation, particularly if reprisal attacks take place in the country. However, the low rating level already incorporates a high degree of political risk and the deeprooted challenges the country faces.