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S&P Reports Assess The Economic And Credit Impact Of Rising Tensions In The Gulf

DUBAI (Standard & Poor's) February 14, 2012--Rising tension between Iran and the West is increasing political and economic risks for sovereign and corporate issuers in the Middle East and focusing attention on the key role of the Strait of Hormuz in trade for the Gulf, says Standard & Poor's Ratings Services in a series of three new reports (see list of publications below).

In response to tougher sanctions, including a boycott of Iranian oil exports by the EU, Iran has threatened retaliation, notably in the form of a blockade of the Strait of Hormuz, a conduit for the flow of oil and gas out of the Gulf.

So far, these threats have been verbal, but analysts are not ruling out the possibility that the current exchanges of rhetoric could spark disruptions to trade flowing through the Strait, or even in an extreme scenario, military confrontation.

At this time, we think the current developments in relation to Iran are captured in our ratings on countries and corporate issuers in the region and so we do not expect any immediate actions. Nevertheless, political pressures in the Middle East are acute, and any sudden deterioration in the situation could lead us to reassess this view.

In the absence of a diplomatic solution, we believe Iran could respond in some way to the latest wave of sanctions and international pressure, most likely--and past behavior suggests this--through low-level provocation.

For example, Iranian authorities could slow shipping through the Strait of Hormuz and disrupt the timely supply of oil from the Gulf by imposing tanker inspections, boarding merchant ships, and otherwise obstructing shipping routes in its territorial waters.

Such low-scale provocation and simmering tension would in our view keep oil prices at their currently high level. This is because markets would increasingly view the specter of armed conflict as a real, if remote, possibility.

"For oil-producing sovereigns of the Gulf Cooperation Council--Saudi Arabia, UAE, Qatar, Kuwait, Oman, and to a lesser extent, Bahrain--higher oil prices would actually be beneficial," said Standard & Poor's credit analyst Elliot Hentov. "As oil exporters, they would receive more foreign earnings that they could either use to stimulate demand or improve their government's balance sheets."

In contrast, the fiscal and external balances of oil importers in the Middle East--especially Jordan, Egypt, and Lebanon--are already stretched. As such, they are ill prepared for a further rise in oil prices. Furthermore, countries in need of attracting investor appetite in 2012, such as Egypt, could suffer from an elevated risk premium in their debt financing. Other non-oil trade could also be affected because of higher transaction and logistics costs for shipping imports into the Gulf states through the Strait of Hormuz.

Our corporate and infrastructure ratings and outlooks also already address the less-than-complete structural mitigants against a severe deterioration in the political climate," said Standard & Poor's credit analyst Karim Nassif. "Yet, we would re-examine our base-case geopolitical assumptions as well as their

effect on our rated corporate and infrastructure issuers if a prolonged disruption in the Strait becomes more likely."

Although we currently see a very low likelihood of a severe disruption of oil supplies through the Strait, a potential oil shock would pose a worrying specter. "Such a disruption of oil supply, should it continue over a period of several months, would in our view lead to a spike in oil prices, which would fuel inflation and upset a fragile economic recovery in both developed and emerging markets," said Standard & Poor's chief economist for Europe Jean-Michel Six. "The ensuing uncertainty would also likely unsettle financial

markets, leading to higher bond yields and once again add to refinancing difficulties for sovereigns on the periphery of the eurozone."

While it's uncertain how rapidly or how high oil prices would rise in such a scenario, our economists envisage that a price of $150 per barrel is not absurd, and would most likely push the world economies into a recession.

The reports are entitled:

• The Impact Of Rising Gulf Tensions On Sovereigns In The Middle East

• Closing The Strait Of Hormuz: The Risks For Corporate And Infrastructure

• Issuers Tension in the Gulf: How An Oil Shock Could Threaten Global Economic Growth

The reports are available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase copies of these reports by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com.

Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office

(44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4009.

© Press Release 2012