Fitch Warns Middle East Credit Risks Could Rise if Iran-Israel Conflict Escalates

Taarek Refaat
Fitch Ratings warned in a new report that the ongoing military conflict between Iran and Israel has heightened geopolitical and security risks across the Middle East, with potential implications for sovereign credit ratings if the violence intensifies or spreads.
While the agency said the current scope of the conflict remains within the tolerable limits of Israel's existing credit rating ('A' with a Negative Outlook), it stressed that future developments could alter this assessment. 'The repercussions so far appear manageable,' the report noted, citing Israel's strong defensive capabilities and the limited economic impact of Iranian strikes to date.
Fitch assumes the conflict will remain geographically limited to Iran and Israel and last only a few weeks. The agency also noted that Iran's ability to project power through proxies in Gaza and Lebanon has been weakened by Israel's military operations in those territories, reducing the likelihood of broader regional destabilization.
Energy Sector Impact
Energy infrastructure in both Israel and Iran has so far remained largely unscathed, though market volatility has increased. Brent crude prices have climbed to around $75 per barrel — up from $65 before the conflict — as a result of heightened geopolitical risk. Fitch estimates that this risk premium may keep oil prices elevated by $5 to $10 per barrel in the near term.
Iran's crude oil production stood at approximately 3.3 million barrels per day in 2024, according to OPEC figures. While a major disruption to Iran's oil infrastructure would place additional upward pressure on global prices, Fitch believes such a shortfall could be offset by OPEC+'s spare production capacity, which totals around 5.7 million barrels per day.
Oil-exporting nations in the region — particularly Saudi Arabia, the UAE, and Kuwait — are likely to benefit from higher energy prices in the short term through increased revenues. Many also have ample financial reserves to weather any short-term instability.
Broader Regional Outlook
Fitch noted that all Gulf Cooperation Council (GCC) states have condemned the Israeli attack on Iran, signaling that Tehran is unlikely to retaliate against Gulf targets. The agency said relations between Iran and GCC countries remain relatively stable, limiting the threat of broader regional conflict.
However, there is concern over potential escalation by Iran-aligned Houthis in Yemen, who may intensify attacks on shipping routes in solidarity with Iran. Disruptions to Red Sea trade, including the Suez Canal — which has already suffered from prior Houthi attacks — could further undermine revenues for countries like Egypt.
Tourism and air traffic across the region have also declined due to security concerns, with countries such as Jordan expected to see a continued drop in European tourist arrivals, potentially weakening economic growth and external revenues.
Risks and Scenarios
Fitch emphasized that its base case assumes the conflict remains limited. However, it warned that more severe scenarios — including attacks on U.S. assets in the region or disruption of maritime traffic through the Strait of Hormuz — could lead to sustained oil price spikes and more serious credit risks for affected sovereigns. Such developments could ultimately outweigh the fiscal benefits of higher oil prices.
'These remain low-probability but high-impact risks,' the agency stated, underscoring the need for close monitoring as tensions continue.
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