Further exchanges of fire between a US-led coalition and the Iran-backed Houthi militia will raise threat levels for US and UK military assets in the Middle East – primarily in the GCC, said Moody's Investors Service in a new report.

Tensions in the region escalated overnight on Thursday as US hit Houthi missile launchers in its continued strikes against the rebels. US Central Command said the Houthi missiles presented an imminent threat to merchant vessels and US Navy ships in the region.

Moody's said an escalation into a direct military conflict that eventually involves Iran pose significant risks to all Middle East sovereigns. 

"We do not expect the targeting of critical energy infrastructure in the GCC, because the ceasefire between Saudi Arabia and the Houthi rebels remains in place and peace talks have advanced. However, an escalation into a direct military conflict that eventually involves Iran pose significant risks to all Middle East sovereigns. This scenario this global implications if critical energy infrastructure becomes targeted or the Strait of Hormuz – which transports around 20%-25% of the world's oil and gas supply – is blocked," Moody's analyst Christian Fang and others wrote.

For the broader Middle East region too there exists the risk of a miscalculation triggering an escalation into a multifront military conflict.

"Continued disruption of trade through the Red Sea will increase transport and logistics costs. We expect this to hurt businesses – or consumers if the higher costs are passed through – especially in Europe, and to exacerbate external financing difficulties for Egypt," The report noted.

Effect on Egypt 

The conflict is likely to have a major financial impact on Egypt, as shipping through the Suez Canal accounts for 2% of the nation's GDP.

Suez Canal Authority chief Osama Rabie said last week that dollar revenues dropped 40% over the first two weeks of 2024 compared to the same period last year.  

Moody's said the partial Red Sea blockade by the Houthi rebels will reduce Egypt's current account receipts via the canal authority but does not expect a significant impact on Egypt's fiscal accounts in the current fiscal year ending June 2024.

"However, the effects would increase if the blockade drags on because the government receives 60%-70% of the authority's revenue, which is likely to amount to around 9% of the government’s revenue for this fiscal year. This may be partly mitigated by further depreciation of the Egyptian pound. Israel would also face some disruption of trade through the Port of Eilat, although it has other ports on the Mediterranean Sea."

With regard to the Hamas-Israel conflict, the ratings agency assumes that the skirmishes remain concentrated in Gaza, albeit for a protracted period.

The confrontations between Israel and its allies against other Iran-backed groups including the Houthi rebels and Hezbollah in southern Lebanon will continue for some time, with at times significant exchanges of fire, it said.

"An escalation in the number and intensity of these incidents brings a corresponding increase in the risk of a miscalculation which triggers a wider regional conflict."  For now, however, an outright multi-front military conflict involving other Iran-backed proxies remains a medium probability scenario, it added.

(Reporting by Brinda Darasha; editing by Seban Scaria)