Fitch Ratings-London: Middle Eastern sovereign ratings generally have sufficient headroom to withstand a short regional conflict that does not escalate further, Fitch Ratings says. However, the course of the conflict is uncertain and lasting damage to key energy infrastructure or protracted hostilities could pose risks to regional sovereign ratings.
The attacks launched by Israel and the US on Iran on 28 February have already had a greater impact than those of June 2025. Fitch’s baseline is that the conflict will last less than a month, with the duration being shaped by factors including the destruction of Iranian military capacity and US aversion to a longer, more involved conflict. Attacks by Iran and its proxies across the region will continue and could intensify over the short term.
Material damage to GCC energy export infrastructure would be the most likely channel to pressure sovereign ratings. While some small damage has occurred, this is not in our baseline. Fitch assumes the Strait of Hormuz will be effectively closed for the duration of the conflict, due to direct physical blockage, vessels being unable to secure insurance or other threat-related factors. Just over 20 million barrels a day of crude and refined products and significant LNG flows transit Hormuz.
Saudi Arabia and the UAE have pipelines that can allow much of their production to bypass the Strait and all key oil exporters have oil in storage away from the region. There is still likely to be some near-term hit to oil and gas activity, particularly for Bahrain, Kuwait and Qatar, which lack supply routes that can bypass Hormuz, and Iraq, whose exports are heavily reliant on the route. Higher energy prices would mitigate the impact of a short-lived disruption on export earnings, to the extent that shipments still get out.
The conflict will have a near-term effect on non-oil economic activity. Much regional air travel has been suspended, consumer activity is likely to have slowed and risk perceptions could have a lingering impact on tourism. Fitch assumes the effect on economic growth will be temporary, but there may be longer-term damage to those parts of the region that position themselves as havens for international businesses and individuals. An outflow of expatriates could put pressure on some GCC housing markets.
Most GCC sovereigns have substantial assets that will provide a buffer in the event of short-term energy revenue disruption, while non-energy sectors are lightly taxed so their disruption would have only a small impact on public finances. An element of geopolitical risk is captured in the ratings of most sovereigns in the region through the World Bank Governance Indicators. In addition, we apply negative qualitative overlay notches to our Sovereign Rating Model (SRM) outputs for Abu Dhabi and the UAE, partly to reflect geopolitical risk, providing additional rating headroom.
Israel’s governance indicators already capture some of the exceptional direct security risks, and the hostile external environment is one driver of a negative notch we apply to Israel’s SRM outcome. However, geopolitical or security events that have a material impact on the economy or public finances are a rating sensitivity, and an extended regional conflict, particularly involving major mobilisation of reservists, could still cause a downgrade, given Israel’s limited headroom at its ‘A’ rating. This is reflected in the Negative Outlook on the rating.
Our base case is subject to particularly high uncertainty. A more prolonged disruption to energy exports than we assume would likely have more severe negative repercussions for sovereign credit profiles in the region. The longer-term orientation and stability of Iran’s government, and the implications for regional security, also remain unclear and could have negative or positive rating implications.