Increased instability could impact regional governments’ economic outlook and financial stability Although Lebanon remains in default, its economic and recovery prospects have further deteriorated RIYADH: The ongoing conflict in the Middle East threatens to undermine sovereign credit ratings across the region if it escalates, according to S&P Global. The agency warned that increased instability could impact regional governments’ economic outlook and financial stability, with broader implications for creditworthiness depending on the conflict’s trajectory. While the immediate effects have been largely contained to specific areas, there are growing concerns that prolonged geopolitical tensions could lead to broader economic disruption across the region, it added. “So far, the sovereign credit impact of the conflict has been confined to the two rated sovereigns directly involved in the conflict: Israel and Lebanon. However, we now foresee several potential pathways via which the conflict could have a more material credit impact on the rest of the region,” said S&P Global. Its rating on Israel is now two notches lower than on Oct. 7, 2023, reflecting weaker fiscal and growth expectations through 2025, along with significantly heightened security risks. The agency also indicated that, although Lebanon remains in default, its economic and recovery prospects have further deteriorated. The report said that key areas of vulnerability include energy prices, trade route security, and capital flows, all of which could face heightened pressure if the conflict continues into 2025 as expected. The agency also said that the persistent uncertainty is likely to weigh on investor confidence, potentially leading to capital outflows and increased volatility in regional markets. While the geopolitical tensions have so far had a limited direct impact on the credit metrics of most Middle Eastern sovereigns, S&P said the potential for wider regional economic stress is growing. The conflict could affect key economic indicators such as growth, tourism revenues, remittances, and fiscal balances, depending on how the situation evolves. Countries more dependent on stable energy prices or vulnerable to trade disruptions, such as energy importers, could face more pronounced fiscal risks, while oil exporters in the Gulf may benefit from rising oil prices in the short term, it added. “Such trade disruptions could be a key challenge for the region, with the potential to increase oil prices and pose fiscal risks to energy importers, although higher oil prices could mitigate the risk for Gulf exporters particularly if the risks of export routes being blocked or oil production facilities being disrupted, remain contained,” added S&P. It said sovereign credit ratings in the region are already factoring in elements of geopolitical risk, but the current conflict could amplify these risks and lead to further rating downgrades. “Further, we now view the conflict as more complex and unpredictable and consider it more likely to persist well into 2025, with potentially lingering aftereffects,” added S&P.