No immediate impact of Pak-India tensions on sovereign credit ratings: S&P

The recent outbreak of hostilities between India and Pakistan has elevated regional credit risks, but there will be no immediate impact on the sovereign credit ratings of either country, S&P Global Ratings said in a note issued Tuesday.

According to the ratings agency, the current military escalation is expected to be temporary, followed by a phase of contained and sporadic confrontations. In such a scenario, S&P said it sees no reason to alter its credit outlook for India (BBB-/Positive/B) or Pakistan (CCC+/Stable/C).

“Nevertheless, the situation raises the specter of miscalculations and accidental clashes that could escalate well beyond the intentions of both sides,” the agency warned. “Such a scenario would materially worsen credit risks.”

S&P expects tensions to remain high over the next two to three weeks, with the possibility of significant military activity on both sides. However, a de-escalation is anticipated after that period, and the agency does not expect lasting damage to either country’s sovereign credit metrics.

“We expect India to maintain strong economic growth that allows gradual fiscal improvements to continue,” the report stated. “We also expect the Pakistan government to remain focused on supporting the recovery of its economy and fiscal stability.”

S&P noted that both governments have little incentive to allow tensions to escalate into a prolonged conflict. For Pakistan, a drawn-out confrontation could derail improvements in its external accounts and fiscal consolidation efforts. For India, it could damage investor sentiment and complicate efforts to attract foreign investment amid global economic uncertainty.

The agency added that the longer the hostilities persist, the greater the potential impact on credit metrics.

“Accidental contacts and other miscalculations present serious risks in a state of active combat,” it said. “If there is no material de-escalation in the next few weeks, downward pressure on sovereign credit profiles will increase.”