Pakistan among most exposed to energy shock from Middle East conflict, S&P says

Pakistan is among a group of lower-income Asian economies that could face heightened economic pressure from disruptions to oil and gas supplies linked to the Middle East conflict, S&P Global Ratings said.

In a report titled “Lower Rated Asian Energy Importers Have Fewer Options To Manage Energy Challenges,” the ratings agency said countries with high dependence on imported energy and limited financial buffers are more vulnerable to prolonged supply shocks.

S&P said its base case assumes hostilities in the Middle East will persist into early April, with the Strait of Hormuz facing material disruptions, while acknowledging risks of further spillovers.

Lower-income economies face higher risks

S&P said higher-income Asia-Pacific economies are better positioned to manage temporary disruptions due to larger reserves and stronger financial capacity.

“Even where they are highly dependent on imported energy, higher-income Asia-Pacific economies generally have more significant oil reserves to meet the shortfall in imports,” said Andrew Wood, a credit analyst at S&P Global Ratings.

“They also have financial resources to acquire available supply in the spot oil and gas markets to secure needed energy,” he added.

By contrast, lower-income economies such as Pakistan, Bangladesh, Laos and Sri Lanka face more limited options.

“The sovereign ratings on some may face pressure if the supply disruption persists longer than our assumptions,” said YeeFarn Phua, credit analyst at S&P Global Ratings.

“These economies have one thing in common: a high dependence on imported energy products. The Middle East war is likely to have a more severe impact on these economies due to their fuel import bills, and generally weaker fiscal and external reserves to withstand supply shortages and high oil prices,” Phua said.

Inflation, currency risks highlighted

S&P said all four countries could see deterioration in key economic indicators if the conflict is prolonged, particularly through higher inflation and currency pressures.

Among them, Laos is expected to fare relatively better due to its reliance on hydropower, while Bangladesh faces constraints given government revenues of about 9% of GDP, limiting its ability to subsidize energy costs.

Pakistan, Sri Lanka and Bangladesh have shown signs of economic recovery, the report noted, but sustained high energy prices and potential disruptions to trade and remittances could undermine that progress.

Ratings impact may remain limited

Despite the risks, S&P said the immediate impact on sovereign ratings may be limited, as existing ratings already reflect many of these vulnerabilities.

However, the agency warned that a more prolonged shock to global energy markets could result in more significant credit deterioration.

“The Middle East war poses a greater risk to Bangladesh, Pakistan, and Sri Lanka, and to a lesser extent Laos,” S&P said, citing their reliance on imported energy and limited reserves.

The report added that while Laos remains vulnerable to extended shocks, conditions supporting its current rating outlook remain intact for now.