Israeli-Hamas war puts Cyprus and Egypt at forefront of credit risks

Cyprus and Egypt are currently facing the most direct credit risks among countries rated by Scope Ratings due to the Israeli-Hamas conflict, warns the German firm.

In a report titled "Hamas Attacks Test Israel's Economic Resilience," the German credit rating agency highlights the risks posed to regional stability and global growth. Egypt (B-/negative outlook), which shares a border with Hamas-controlled Gaza, and Cyprus (BBB/Stable), dependent on Israel for oil and gas supplies, are currently at the forefront of immediate credit risks.

On a different note, Scope suggests that Turkey (foreign currency rating: B-/negative) may enhance its regional influence as it seeks to promote stability, similar to its role during the Russia-Ukraine conflict.

In a scenario where the Israeli-Palestinian conflict escalates regionally, pushing oil prices above $100 per barrel, concerns about global inflation and central bank responses are likely to rise. This could negatively impact economic growth and credit ratings in various states.

Uncertainty regarding oil markets, inflation, and growth persists, and Scope points out that the resurgence of the Israeli-Palestinian conflict raises concerns about long-term effects on oil prices.

Geopolitical tensions could hinder the normalization of diplomatic relations between Saudi Arabia and Israel, potentially affecting U.S. President John Biden's foreign policy goals.

Furthermore, Scope warns of the potential for the Israel-Gaza conflict to spread to other parts of the Middle East due to Iran's support for Hamas and Hezbollah.

In a broader context, Scope's report indicates that Middle Eastern and North African oil-producing countries rank among the world's largest spenders on military equipment relative to their economic output. Civil conflicts in Libya, Sudan, Syria, and Yemen have contributed to this phenomenon.

Israel, in particular, faces increased credit risks as a result of the Israeli-Palestinian conflict. However, the potential long-term and deeper repercussions could extend to the Greater Middle East.

The report emphasizes that the conflict's timing is precarious for the global economy, with central banks tightening policies to control inflation while public finances are strained. Israel's Shekel and government bonds have been affected, with yields reaching their highest levels since 2012.

Nevertheless, Israel's diverse funding sources and long-term debt maturities, along with support from the U.S. debt guarantee program, mitigate concerns about its capital markets funding. Israel's Central Bank has a strong track record in currency management and has announced a program to sell foreign reserves worth up to $30 billion to support the Shekel.

As of August 2023, Israel's foreign currency reserves exceeded 200 billion euros, amounting to 125% of gross foreign debt, a significant buffer against economic and financial shocks.