Moody's Investors Service has changed its outlook for Bahrain and Iraq from stable to negative, citing the regional conflict's ill-effects on trade and energy flows.
Critical infrastructure in Bahrain had been among Iran's targets in the Gulf as part of Tehran's retaliations to attacks from US and Israeli forces. That was coupled with the effective closure of the Strait of Hormuz, which disrupted exports of key Bahraini products.
The waterway, however, was reopened on Friday, after a ceasefire between Lebanon and Israel - which was then quickly reversed by Iran on Saturday, accusing the US of breaking certain aspects of their deal. Washington and Tehran are in the midst of a two-week truce that expires on April 22.
Moody's said its negative outlook for Bahrain stems from the "persistent deterioration in Bahrain's underlying credit metrics and may weaken its credit profile" due to the war.
"The disruption of maritime shipping through the Strait of Hormuz and air travel around the Gulf is affecting Bahrain's hydrocarbon and aluminium exports because of the inability to reroute trade, as well as the tourism sector," analysts at the New York-based ratings agency said on Saturday.
"These disruptions will lead to a further deterioration in fiscal and debt metrics from already weak levels, despite renewed efforts by the government to implement fiscal reforms at the end of 2025."
Moody's also affirmed Bahrain's B2 credit rating, which is six levels below investment grade, according to its scale. Investment grade makes it easier for a country to access capital markets and raise funding when it wants to borrow.
Bahrain's rating would be upgraded if the conflict ends and the country will be able to resume normal oil and aluminium exports "with no prolonged impact on the country's export capacity or economic model", Moody's said.
Moody's outlook for Iraq, meanwhile, was also downgraded to negative, on risks to energy flows, as 90 per cent of the country's crude exports pass through the Strait of Hormuz, and security uncertainties due to its close proximity to Iran.
It also affirmed Iraq's credit rating at Caa1 - eight notches below investment grade.
"The risk that Iraq is drawn more deeply into the regional conflict has increased following attacks on energy, diplomatic and security interests, underscoring Iraq's fragile internal balance and its geopolitical positioning between Iran and the US," Moody's analysts said in a separate report on Friday.
Jordan, on the other hand, maintained its stable outlook, with Moody's citing "solid and effective macroeconomic and fiscal policymaking institutions". The agency affirmed its Ba3 credit rating, which is four levels below investment grade.
They cautioned that Jordan remains exposed to risks from the conflict and shifts in US policy, "which could weigh on external dynamics and government finances, despite its demonstrated resilience".
Middle East countries, especially net energy exporters, have been significantly affected by the war, especially as they have been unable to ship their key crude and energy products, causing crises and sparking inflation.
The World Bank, in a report earlier this month, expects economic growth in the Middle East to slow to 1.8 per cent this year as a result of the Iran war, warning the fallout can result in long-term “scarring”.
The Washington based organisation said Bahrain's economy is expected to grow 1.3 per cent, down from a previous 3.1 per cent estimate. Iraq's economy is to contract by 8.6 per cent, while Jordan's will grow 2.7 per cent, it noted.
