The re-escalation of armed hostilities between Iran and the US since late June points to the likelihood of a slow and bumpy road toward a more durable settlement in the region, says Moody's Ratings (Moody's).
In an outlook update, Moody’s said that the re-escalation is further underscored by renewed threats from the Iran-backed Houthi rebels in Yemen to disrupt Red Sea shipping through the Bab Al Mandab Strait that could compromise Saudi Arabia's alternative trade route.
The conflict has demonstrated Iran's ability to disrupt critical shipping lanes and threaten security and infrastructure of the GCC sovereigns through relatively low-cost means by using naval mines, short-range missiles, and a very large number of one-way attack drones (UAVs).
Moody’s said, “This has turned a previously low-probability, high-impact risk into an active constraint on regional credit conditions, highlighting geopolitical risk as a key constraint on our assessment of sovereign creditworthiness in the Gulf region. It has also underscored the role of alternative export routes that bypass the Strait of Hormuz as a key mitigant of elevated geopolitical risk.
“We expect repeated setbacks in the US-Iran negotiations to keep a geopolitical risk premium embedded in elevated, albeit volatile, oil prices, which will benefit hydrocarbon exporters that retain export market access.”
In the absence of a credible long-term agreement, the conflict may increasingly weigh on the GCC’s attractiveness as a destination for capital, talent and tourism. Similarly, in the wider region, the fundamental tension between Israel and Iran is likely to remain a key source of geopolitical instability, particularly in Lebanon where Iran-backed Hezbollah retains strong support among a section of the population.
Overall, geopolitics will remain in a state of flux and could shift in unexpected ways as underscored by the recent signing of a civil nuclear deal between the US and Saudi Arabia.
What could change the outlook
Moody’s said that a durable and credible de-escalation, sustained reopening of the Strait of Hormuz, and a faster-than-expected recovery in trade, hydrocarbon production, tourism and investor sentiment could support a return to a stable outlook.
It added, “Conversely, intensification of the military conflict leading to significant damage to the region’s energy or civilian infrastructure, a slower-than-expected reopening of the Strait or a durable disruption of alternative trade routes, and evidence that security concerns are durably weakening the region’s non-hydrocarbon growth model would deepen negative credit pressures.”