Rise in US-Iran Tensions Already Captured in Sovereign Ratings

Proshare

Wednesday, January 08,  2020 /09:07 AM / By Fitch Ratings / Header Image Credit: Grit Daily

 

The potential for a broader escalation of conflict in the Middle East has increased with the death of senior Iranian general Qassem Soleimani, but remains contained as the US and Iran do not seem to have an interest in a full-scale confrontation, Fitch Ratings says. Significant geopolitical risks are already factored into ratings for sovereigns in the region that are most likely to be affected.

 

There is a high likelihood that Iran will respond to the death of Soleimani, who was killed in a US air strike, by launching attacks either directly or through its regional proxies, as well as by intensifying its nuclear programme. However, Iran's options may be constrained by the recent backlash against Iranian influence in Lebanon and Iraq, and its desire to avoid an escalation of tensions with third-party countries. Kuwait and Qatar host US military bases, but have in the past acted as mediators for Iran, while Saudi Arabia and the UAE are US allies but have recently been taking steps to reduce tensions with Iran.

 

We believe that ratings for the countries most likely to be affected by any Iranian action already reflect this risk appropriately. Geopolitical risk already weighs on the ratings for several sovereigns in the Middle East and was a major contributor to Fitch's downgrade of Saudi Arabia's ratings to 'A' from 'A+' in September 2019. In addition, most Gulf sovereigns (barring Bahrain, Iraq and Oman) have large fiscal buffers, supporting their resilience.

 

The increase in US-Iran tensions creates a geopolitical headache for Iraq. Political risks already weigh heavily on our rating for Iraq (B-/Stable). If Iraq moves closer to Iran and follows up parliament's initial decision to expel US troops, this would risk a response from the US, which could, among other options, impose sanctions or withdraw its sanctions waiver on Iraq's imports of gas from Iran. These outcomes do not form part of our baseline forecast, but could be credit negative for Iraq, depending on the severity of the action. There is also a risk that Iranian retaliation in collaboration with its Lebanese ally, Hezbollah, could further complicate efforts by Lebanon (CC) to secure external financing.

 

We believe that both the US and Iran will look to avoid a full-scale military confrontation. Such an outcome would carry a huge cost for Iran, given that its economy is already struggling and that the US has overwhelming military superiority. On the US side, it would be a politically risky tactic for Donald Trump in an election year. Nonetheless, both the Iranian and the US positions are fluid and hard to predict, and miscalculations could lead to a spiral of provocations, making attacks harder to escape.

 

Our base-case assumption is that there will be continued attacks between the US and Iran, but at a level carefully calibrated to avoid forcing the other side into full-scale military action. In the absence of an all-out conflict, upside risks for global oil prices will be limited by the fact that the market looks well supplied in view of continued production growth in the US, Brazil and Norway, particularly given that we expect global economic growth to remain sluggish.

 

Nonetheless, the tail risk of more destabilising outcomes has risen in the wake of Soleimani's killing. These outcomes could involve major conflict or serious disruption to global oil and gas supplies, including through the Strait of Hormuz. Such scenarios are likely to result in a substantial increase in global oil prices and could trigger significant loss of export receipts for sovereigns in the Gulf region, although Oman's export infrastructure is geographically less vulnerable. Our most recent reviews of several sovereigns in the region, including Abu Dhabi, Iraq and Saudi Arabia, highlighted that geopolitical or security shocks that hindered oil production or exports or impacted economic, social or political stability could lead to negative rating action.


Proshare Nigeria Pvt. Ltd.

 

Related News

  1. US vs Iran: Broad Implications for Nigeria
  2. US, Iran Hostilities: Global Crude Oil Prices Trend Upwards
  3. Prospect Of War Pushes Oil To Seven Month High - OIR 030120
  4. US Attack on General Soleimani: 3 Things To Watch

 

Proshare Nigeria Pvt. Ltd.


Related News - Global Market

  1. Global Wildfire Risk Illustrates ESG Factor Relevance for Credit
  2. Can Team Ramaphosa Stabilize South Africa's Economy?
  3. The French-backed CFA franc is Going. Will The New Eco Be as Stable?
  4. Ghana Backs West Africa's Eco, Opposes Euro Peg
  5. A Unified Currency: UEMOA Adopts Eco, Drops CFA franc
  6. Bank of Ghana Issues Release Over Statements Describing The Introduction of Higher Ghana Cedi
  7. Fitch Identifies Key ESG Trends Relevant To Credit Ratings
  8. U.S. Transportation Infrastructure Growth to Mirror Slower GDP in 2020
  9. Hong Kong's Role in Global Finance Intact Despite Unrest
  10. Phase I US-China Trade Deal Will Not Resolve US Corporates' Trade Concerns
  11. US-China Trade Tensions Eased But Not Resolved
  12. Major Investment Trends in North America in 2019
  13. SSA Growth Story: Unsynchronized
  14. Gloomy Economy, Low Rates Put Pressure on Western European Banks
  15. Federal Reserve Issues FOMC Statement - Dec 2019
  16. Nigeria and South Africa: A Reason to Worry?
  17. Global Banks Start to Embrace ESG In Their Risk Management
  18. No More Half-Measures on Corporate Taxes - Confronting a Broken System
  19. Escaping Japanification Difficult for Eurozone If It Takes Root
  20. Monetary Policy Decisions: Four SSA Countries At The Center-Stage

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
READ MORE:
Related News
SCROLL TO TOP