In Summary
The Middle East conflict and the disruption of the Strait of Hormuz have led to a broad-based reassessment of non-payment risks, with country downgrades outweighing upgrades. We downgraded the non-payment risk backdrop for five economies (Kuwait, Qatar, Serbia, the UK and the UAE) and upgraded only three (Azerbaijan, Costa Rica and Kazakhstan). Downgrades are due to either first-round effects such as higher input prices and rising supply shortages jeopardizing profitability or simply to growing domestic fragilities such as the UK’s fiscal situation. Triple-deficit economies – energy, current account and fiscal – are set to bear the brunt of second-round effects, notably Ukraine, Jordan, Pakistan, Kenya and Ethiopia, followed by Ghana, Egypt, Sri Lanka, Türkiye and Morocco. In Asia, we are closely monitoring Indonesia, Thailand, Philippines and Taiwan. Third-round effects are also becoming more visible as FX reserve accumulation has decreased and tighter external financing conditions begin to feed into higher sovereign risk premia and rising debt-service costs, particularly in countries geographically close to the conflict and those where weaker external buffers and policy constraints amplify vulnerability (e.g. Türkiye’s gross reserves are down -25%).
Sector risk ratings, measuring non-payment risks by sector, have also deteriorated markedly, reversing the improving trend seen since mid-2025. The global transport sector and the energy sector in GCC countries in particular are caught in the crossfire. Europe’s energy-intensive companies, already affected since the 2022 energy crisis, are set for even tighter margins. With 21 sector rating downgrades versus just six upgrades – one of the sharpest negative balances since end-2022 – the impact is already visible. Gulf countries sit at the epicenter, accounting for more than half of our proprietary rating downgrades, particularly in energy and transport-related sectors. Bunker oil prices have surged by around +70%, pushing total operating costs up by +25% for sea carriers, while freight rates have increased only modestly (+16%), squeezing margins amid weak demand. Airlines face a different dynamic: although jet fuel prices have hit record highs, stronger pricing power has allowed fares to rise significantly (up to +70% on some long-haul routes). However, the sector is also grappling with major disruptions, including over 70,000 flight cancellations and the closure of key Middle Eastern hubs, with tourism losses for the region potentially reaching USD55bn and international arrivals dropping by around -30% y/y in 2026. Fragilities are also resurfacing in already weakened sectors, notably chemicals and metals in Europe, highlighting the broadening reach of the shock. In Europe, natural gas accounts for 40% of final energy consumption across industries, leaving the already downsizing chemicals, steel and cement sectors in the dark in 2026.
Beyond these first-round effects, the risk of broader and more persistent second-round impacts is rising. The Middle East’s central role in supplying critical inputs such as LNG, fertilizers, aluminum, helium and sulfur is also pushing up costs across global value chains, from agrifood to manufacturing, healthcare and technology. Emerging markets remain particularly vulnerable, followed by Europe, where energy-intensive sectors now face further capacity reductions, while consumer confidence and pricing power show early signs of strain. If the shock persists, tighter financial conditions, weaker demand and rising input costs could trigger a more systemic downturn, echoing – or potentially accelerating – the dynamics seen during the 2022 energy crisis.