The intensity and scope of military actions in the Middle East represent a major escalation in hostilities, said S&P Global Ratings today. 

The suspension of the vast majority of shipping through the Strait of Hormuz, and the rise in over-the counter Brent oil and liquefied natural gas prices are perhaps the most concrete market responses to the conflict so far. 

"The gravity of the situation has moved from high to severe in our pre-defined scenarios and consequently, the potential for events to weaken credit quality across sectors has increased," it said.

"Our base-case scenario remains that military confrontation will be relatively short lived. However, public statements of US military operations lasting up to one month and the nature of US and Israeli military objectives--including regime change--are far broader than those relating to the 12-day war in June 2025. The intensity and geographic reach of attacks are also far wider than those seen last year," it said.

The conflict is already affecting trade and supply routes, including the Strait of Hormuz, and energy prices and aviation, with airspace closed across the region. 

For Iran’s regime, the conflict is near existential, meaning that it will likely continue to retaliate when and where it sees fit, having already targeted US military assets in the United Arab Emirates (UAE), Jordan, Oman, Kuwait, Iraq, Qatar Bahrain, and Saudi Arabia. Iran is also likely to keep targeting critical infrastructure across the region, including airports and ports, with some civilian and military casualties. 

Shipping disruption may cause multisector strain

The effective closure of the Strait Of Hormuz has the potential to transmit credit strain across sectors. Shipping companies have started to cancel voyages amid threats from Iranian naval forces and sharp spikes in insurance costs. Depending on the severity and duration of the conflict, several channels may show signs of strain. 

These include: 

• Trade and supply routes (particularly affecting the energy sector),

• Energy prices and volume flow (particularly to Asia)

• Capital flows,

• Tourism, and

• Population movements.

Moreover, borrowing costs are likely to rise sharply--at least in the short term--and expose issuers that have significant or imminent refinancing needs. 

Sovereigns

Significant geographic differences among regional countries will influence their vulnerability to supply-chain disruptions and the conflict in general. Higher oil prices would generally benefit  hydrocarbon producers, although this will depend on how long the Strait of Hormuz is obstructed. 

S&P said it considers a prolonged blockage of the strait to be unlikely, given the substantial US military presence in the region. However, exposure to a closure is higher for Iraq, Bahrain, Qatar, and Kuwait, reflecting their reliance on this route.

Higher oil prices will bring some relief to the fiscal outlook of Gulf Cooperation Council (GCC) sovereigns -- at least in the near term -- assuming barrels can be exported. However, the extent of obstructions to key trade routes or to production have the potential to induce fiscal strain through weakened revenues, which could be particularly relevant for governments with weaker balance sheets, larger banking systems and limited export options. 

In contrast, Oman, the UAE, and Saudi Arabia can partially mitigate the impact through alternative export routes for part of their volumes, although transport and hydrocarbon production facilities may be at risk anywhere in the region. Given that the Iranian regime is fighting for its existence, efforts to broaden the theatre of retaliation outside of the Middle East and North Africa region (Cyprus has already been targeted), can't e ruled out albeit constraints on Iran’s military reach are considerable, S&P said.

Financial institutions

S&P says it considers the risk of capital outflows has increased for financial institutions, posing a greater risk to banks in the region. Previous confrontations have mostly led to flights to quality within the local banking systems. However, given the larger scale of the current confrontations, the scenario of moderate external capital outflows can't be excluded. However, most banking systems will be able to withstand it, said S&P.

Ultimately, the duration and the scope of hostilities will determine the magnitude of outflows. 

Corporates and infrastructure

In the near term, corporates and infrastructure companies face heightened operational and financial risks stemming from energy price volatility, supply-chain disruptions, operational disruptions, and higher security and insurance costs.

Companies with high-value, prominent assets--such as airports, ports, hotels, and tourism landmarks--face elevated exposure to physical disruption and cyber risk. There could also be regulatory intervention for sectors such as utilities and telecommunications.

Companies that rely on export routes via the Strait of Hormuz are especially susceptible to operational network vulnerabilities. These include shipping delays and reroutes, higher freights rates, and potential chokepoint closures if a prolonged blockage materializes.

Oil and gas companies

For the global oil market, a prolonged conflict could affect volume flows and, ultimately, prices. The impact on oil and gas companies to extend beyond producers to all entities connected to the value chain. This includes shipping companies, port operators, and downstream businesses. Oil and gas companies are facing disruptions at regional ports, including in Oman and the UAE, for example.

War risk insurance premiums for vessels transiting the Gulf have spiked, with some policies reportedly cancelled and repriced at materially higher levels, in certain cases by as much as 50%. 

This rapid repricing of risk underscores the speed at which geopolitical escalation can influence operating costs and trade flows, further elevating freight expenses and liquidity pressures for issuers exposed to regional shipping and energy flows.

Real estate impact

At the same time, deteriorating consumer and investor sentiment can weigh on demand, asset values, and access to capital. The real estate sector is particularly vulnerable to slower transaction volumes and softer pricing.

Tighter funding conditions and weaker sentiment can materially impair access to liquidity and financing, which in turn increases the probability of default in the short term, it said. - TradeArabia News Service