S&P Warns: Prolonged Israel-Iran War Could Shake Regional Economies, Energy Markets

In a detailed economic review released on Monday, S&P Global Ratings assessed the financial risks posed by the escalating war between Israel and Iran, with a focus on the potential impact on regional economies, energy markets, and investor sentiment.

“Israel's economy has historically shown resilience,” the report notes, citing its large high-tech services sector and a workforce with high remote work capabilities, which together provide some insulation against security shocks. S&P analysts also pointed out that tourism contributes only 2–3% of Israel’s GDP, limiting the direct economic impact of travel disruptions.

The rating agency did not downgrade Israel's credit rating, nor did it indicate plans to do so imminently—a softer stance compared to a May 10 statement in which it warned of a potential downgrade if war with Iran escalated. Still, S&P maintained a negative outlook on Israel’s credit rating, stressing that the duration and intensity of the conflict will be decisive.

Confidence Holds—For Now

Addressing the stability of Israel’s financial system, S&P noted that "previous rounds of conflict had only limited effects on domestic banking behavior." There were no signs of instability in bank deposits or mass conversions to foreign currencies, but the report warned that this could change if the war persists or intensifies.

"Prolonged, high-intensity military activity may change the behavior of Israelis and cause them to withdraw bank deposits or convert them to foreign currency,” the economists cautioned.

The report also flagged concerns over Israel's budgetary pressure, noting high defense spending and the country’s vulnerability to infrastructure damage due to its small size and population density.

Four War Scenarios: From Contained to Catastrophic

S&P outlined four possible scenarios with varying levels of escalation and economic impact:

1. Baseline Scenario – A war lasting under three months, involving only Israel and Iran, and no significant impact on oil prices or trade routes. No credit downgrades expected.

2. Moderate Escalation – Slightly longer conflict, limited involvement of other countries, minor trade disruptions. A credit rating downgrade could occur under this scenario.

3. Prolonged Conflict – Involves greater military pressure, blockages of trade routes, rising oil prices, and wider regional involvement. Higher risk of economic destabilization.

4. Worst-Case Scenario – A full-scale regional war, major disruptions to global oil flow through the Strait of Hormuz, and severe inflationary shocks globally. Likely to lead to credit downgrades, capital flight, and systemic financial risks in several countries.

Strait of Hormuz: Global Energy Bottleneck

The report emphasizes the strategic risk posed by the Strait of Hormuz, through which about 20% of the world’s oil flows. Any disruption by Iran—either by targeting oil tankers or mining the waterway—could have global repercussions.

Iran accounts for 3% of global oil and 6% of global gas production, and a reduction in exports could drive energy prices sharply higher, with inflationary consequences for many economies, including Israel’s.

Qatar, Egypt, Jordan, and Lebanon Most Exposed

The report highlights that Israel may not be the most vulnerable to the economic fallout. Countries with less diversified economies and weaker financial systems, such as Qatar, Egypt, Jordan, Iraq, and Lebanon, could suffer greater relative harm.

• Qatar, for example, exports natural gas through the Strait of Hormuz and is particularly exposed. If shipping is disrupted, 31% of the country’s banking deposits—held by foreign investors—could be at risk of withdrawal. S&P estimates Qatar’s government may need to inject up to $9 billion to maintain banking stability.

• Saudi Arabia, though a major oil exporter through the Strait, is less exposed due to recent efforts to diversify its economy.

Other countries, especially those reliant on tourism, trade routes, or susceptible to proxy attacks and unrest, may face severe economic shocks even without direct involvement in the war.

High Stakes, Uncertain Outcomes

S&P’s review underscores that while Israel’s economy is robust in peacetime, the unpredictable duration and intensity of the Israel-Iran war pose serious risks. The greatest threats may lie not in Israel, but in the broader region, where economic fragility, trade dependencies, and volatile energy markets amplify the impact of conflict.

As global markets watch the Strait of Hormuz and the skies above Tehran and Tel Aviv, credit agencies, investors, and governments alike are bracing for a geopolitical and economic storm that could reshape the region—and the world.