More risk from Iran war to Bangladesh, Pakistan, Sri Lanka: S&P Global

These countries are particularly vulnerable to rising oil prices and potential supply disruptions, it noted in a recent article.

The Iran war poses a greater risk to Bangladesh, Pakistan and Sri Lanka, and to a lesser extent Laos, due to their high dependence on imported energy and limited reserves, S&P Global Ratings said.
These countries are particularly vulnerable to rising oil prices and potential supply disruptions.
All four governments are likely to see significant credit metric deteriorations, if the conflict is prolonged.

In our base case scenario, the war is unlikely to have a material impact on our sovereign ratings on these countries, but a more prolonged price and supply shock in global energy markets could cause more pronounced credit damage.

Pakistan, Sri Lanka, and Bangladesh are showing signs of economic recovery. The three countries have made progress, but sustained high energy prices and potential disruptions to trade and remittances could derail their fragile economies.

S&P Global Ratings believes the higher-income Asia-Pacific (APAC) economies are better placed to weather temporary disruptions to oil and gas supply from the Middle East.

Even where they are highly dependent on imported energy, they generally have more significant oil reserves to meet the shortfall in imports. They also have financial resources to acquire available supply in the spot oil and gas markets to secure needed energy, the rating agency noted.

Lower-income economies in the region do not enjoy such flexibility. The sovereign ratings on some may face pressure if the supply disruption persists longer than our assumptions. Bangladesh, Laos, Pakistan and Sri Lanka are among this group. These economies have one thing in common: a high dependence on imported energy products.

The Middle East war is likely to have a more severe impact on these economies, due to their fuel import bills, and generally weaker fiscal and external reserves to withstand supply shortages and high oil prices.

Among the four sovereigns, Laos is likely to fare better due to the dominance of hydropower in its energy mix.

Bangladesh, with government revenues at only around 9 per cent of gross domestic product, has fewer options to cap electricity and fuel prices through fiscal means.

All four governments are likely to see significant credit metric deteriorations, through inflation and currency channels, if the Middle East conflict is prolonged. However, the impact on the agency’s ratings on these sovereigns may be limited, as the generally low rating levels have already captured a significant share of the risks.

S&P Global Ratings’ base case for the Middle East war assumes that elevated hostilities will persist into early April, with the Strait of Hormuz facing material disruptions.

Fibre2Fashion News Desk (DS)