Global rating agency Standard & Poor's (S&P) has said that the killing of Iranian general Qassem Soleimani by the US and the ongoing fallout have rapidly escalated event risk in the Gulf region and the development does not alter the rating base-case assumption that any military action by either side will not lead to a fully-fledged direct military confrontation.
Tensions soared in the Gulf region after Soleimani, the 62-year-old head of Iran's elite al-Quds force, was killed in a US drone strike outside Baghdad airport on Friday.
While Iran vowed "severe revenge" for Soleimani's death, US President Donald Trump said there would be "major" retaliation if Tehran hits back.
"For now, this development does not alter our base-case assumption that any military action by either side will not lead to a fully-fledged direct military confrontation," the S&P said in a statement.
"We continue to believe that any escalation will remain contained given that a direct conflict would be economically, socially, and politically destabilising for the entire region, including US-Gulf allies," it said.
The rating agency said a potential intensification of proxy conflicts will further undermine confidence and investment in the region.
"Our ratings on Gulf sovereigns already take into account a certain level of regional geopolitical volatility," it said.
According to S&P, if a protracted and wider conflict emerges, assuming export routes remain functional, the fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and weaker economic growth.
"In such a scenario Abu Dhabi, Kuwait, Qatar and Saudi Arabia would likely be better cushioned by their large stocks of deployable government external assets. On a flow basis, we view Bahrain and Qatar as more vulnerable to outflows given their high external financing needs, relating to their respective banking sectors," it said.
