Fitch Ratings feels Israel's credit rating can ‘absorb the impact’ of conflict with Iran. Here's why

Fitch Ratings on June 16 said that while the Israel-Iran conflict has hightened geopolitical and security risks in the Middle-East, and could negatively impact some sovereign credit profiles, Israel current credit rating level is “within range” to absorb the impact.

“The spillover from the conflict appears to be within the range that can be absorbed at Israel’s ‘A’/Negative rating level,” Fitch Ratings said.

The agency's belief comes from the assumption that the conflict is likely to remain “contained” between Israel and Iran, and that OPEC countries have enough oil reserves to make up for any supply lost from Iran. It also noted that impact on tourism and infrastructure projects in the region, but added that it does not expect the conflict to “persist more than a few weeks”.

Fitch assumes conflict will not ‘persist’ for long

Fitch in its report also noted that it assumes the conflict will “remain contained” between Israel and Iran, and “will not persist for more than afew weeks”.

Explaining why it believes Israel will be resilient, Fitch Ratings said, “Israel has strong defensive countermeasures and it appears that Iranian strikes have not had a material economic impact. We believe Iran’s capacity to retaliate against Israel via proxies in Gaza and Lebanon has been damaged by Israel’s military campaigns in those regions. Both factors suggest it is likely that damage from Iran’s military response to Israel’s latest attacks will not be on a scale that would affect Israel’s rating.”

Can OPEC producers replace Iran oil if needed?

Yes, believes Fitch Ratings. It noted that brent crude oil prices have surged near $75 per barrel from around $65/barrel before the conflict, adding that they expect the geopolitical risk premium in oil prices to be contained at between $5-$10.

“Material disruption to Iran’s production or export infrastructure would add more upward pressure to prices. However, even in the unlikely event that all Iranian exports are lost, they could be replaced by spare capacity from OPEC+ producers, which is around 5.7 million barrels a day,” the Fitch report said, adding that OPEC numbers show that in 2024, Iran produced some 3.3 million bpd of crude oil.

“Higher oil prices would benefit the region’s oil producers, through higher fiscal and external revenues, particularly should they raise output to offset lower Iranian exports,” it added.

Fitch sees conflict ‘contained’ between Israel-Iran

Fitch added that rating implications will depend on the course and outcome of the conflict, including whether it remains restricted between Israel and Iran, or spreads.

It further noted that member states of the Gulf Cooperation Council (GCC) all condemned Israel’s attack on Iran — reinforcing their “baseline view that relations between Iran and the GCC member states remain fairly good and that an Iranian move against targets in the GCC is unlikely”.

“Some GCC sovereigns, such as Kuwait, Qatar, Saudi Arabia and the United Arab Emirates, have large credit buffers that would cushion the effect of any increase in security risk,” it added.

On the Houthi factor, Fitch acknowleged that it is possible that the Houthi forces in Yemen could “escalate” their attacks in support of Iran, and aggravate disruption to regional shipping, including traffic through the Suez Canal, which is yet to recover from the increase in Houthi attacks in 2024, but this would also reduce Egypt’s earnings from the canal.

Tourism, shipping to see low earnings, risks

The report added that lower regional air traffic and tourism would pose risks to external earnings for some countries in the region.

“Jordan’s tourism sector, for example, is likely to suffer a renewed drop in European tourism, with negative effects on growth and fiscal receipts. However, if the conflict does not escalate beyond our baseline these risks are likely to be contained and are unlikely to drive rating changes,” it added.

It however highlighted the risk of Iran’s response being more disruptive than expected. “For example, an Iranian strike against US-related targets in the Gulf, including bases within the GCC, cannot be ruled out,” it stated.

“Under more severe scenarios involving a significant broadening of the regional conflict or disruption to shipping through the Strait of Hormuz (neither part of our baseline), oil prices could be higher than we project for a sustained period. There could also be greater negative repercussions for sovereign credit profiles in the Middle East, which could outweigh any benefits from higher oil prices. Nonetheless, we view such scenarios as unlikely,” the Fitch report stated.