New York [USA], Jan 6 (ANI): The recent US drone strikes in Iraq that killed Iranian Maj Gen Qassim Suleimani and Iraqi Popular Mobilisation Forces Deputy Head Abu Mahdi al-Muhandis among other Iranian and Iraqi officials mark a significant escalation of tensions, according to Moody’s Investors Service.
There have been initial retaliatory attacks on US assets in Iraq as well. “As a base case, we continue to assume that the United States and Iran will avoid outright military conflict. However, the risks have markedly increased in the past few days,” said Moody’s in a research report.
The credit implications of military conflict will depend on its duration, scope and the severity of damage to critical infrastructure — factors that remain highly uncertain for some time should an outright military conflict start.
In particular, depending on its scope, the sovereigns and other issuers affected could include Iraq, issuers in the Gulf Cooperation Council (GCC), and potentially even the broader region including Lebanon, said Moody’s.
The main channels of credit transmission will be an immediate effect of the shock to exports and fiscal revenue, should hydrocarbon production capacity be impaired significantly and durably.
Furthermore, in Iraq and across the GCC, governments’ capacity to recycle hydrocarbon revenue is key to growth in the non-oil and gas sector.
As such, all issuers will be affected by shortfalls in hydrocarbon revenue with the degree of effect varying according to their credit profiles’ sensitivity to oil and gas output and the size of their foreign exchange and fiscal reserves.
“A lasting conflict will have wide-ranging implications through broad economic and financial shock that significantly worsen operating and financing conditions. Damage to crucial infrastructure and the temporary disruption of trade will affect non-financial companies, said Moody’s.
For instance, the United Arab Emirates (UAE) — especially Dubai — will also be affected because of the importance of its logistics and tourism sectors.
Also, increased risk aversion will be negative for all issuers, in particular those with large external financing needs and relatively smaller or insufficient reserves, including Oman and Bahrain.
Moreover, banks will be exposed to governments drawing down on their deposits as they try to buffer the shock. A protracted conflict will potentially have global repercussions, in particular through its effect on oil prices.
For hydrocarbon producers, an increase in oil prices can mitigate some of the credit-negative implications as long as global demand for oil remains sustained and for those sovereigns that are able to continue exporting oil and gas.
In the Middle East, Oman which lies geographically outside the Gulf and has maintained a neutral stance amid rising regional geopolitical tensions is the least exposed to potential disruptions in critical production and transportation infrastructure.
The sovereigns potentially affected have very different capacity to absorb shocks — from extremely limited for governments in Iraq and Lebanon to more significant for sovereigns in the Gulf including Kuwait, Qatar and the UAE.
However, in case of a prolonged and broad conflict, even these governments’ capacity to support their related issuers can become impaired, said Moody’s.
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