Strait closure risks escalate as Kuwait moves into ‘severe’ scenario

2026-03-03 - 19:38

A new report by S&P Global Ratings has warned that Kuwait remains highly sensitive to oil price fluctuations and heavily dependent on export flows through the Strait of Hormuz. However, the agency stressed that Kuwait’s massive global financial assets provide it with a relative capacity to absorb shocks. S&P said that any prolonged closure of the Strait could pose tangible risks for several regional economies, even though hydrocarbon-producing countries may benefit from higher energy prices in the short term. So far, the most immediate market reactions have included the suspension of most shipping traffic through the Strait, alongside rising Brent crude and liquefied natural gas prices in over-the-counter trading, reports Al-Rai daily. The agency upgraded its assessment of the current crisis from a “high” to a “severe” scenario under its stress frameworks, increasing the likelihood of credit deterioration across multiple sectors. It noted that the conflict is already disrupting trade and supply routes—particularly energy exports via Hormuz—while also affecting aviation due to regional airspace closures. Infrastructure and Regional Exposure S&P explained that the effective closure of Hormuz transmits credit pressures through trade flows, capital movements, tourism, and borrowing costs. Issuers with near-term refinancing needs face heightened risks as financing costs rise. The agency outlined varying levels of vulnerability across the region: Iraq: Most oil exports pass through Hormuz, increasing exposure. Egypt: As a net energy importer, it faces risks to Suez Canal revenues, though Mediterranean access offers partial mitigation. Bahrain: High debt levels and oil dependence raise vulnerability to capital outflows. Jordan: Tourism revenues—about one-third of current account receipts—remain highly sensitive. Oman: Lower relative risk due to export facilities in Sohar and Duqm. Saudi Arabia: Around 80% of exports pass through Hormuz, but the East-West pipeline (5 million barrels per day capacity) provides partial mitigation. Qatar: Strong fiscal buffers but high external debt and exposure through the shared North Field with Iran. Abu Dhabi: Roughly half of oil exports can bypass Hormuz via the Fujairah pipeline. Banking and Corporate Pressures S&P warned of increasing capital outflow risks. While most banking systems could withstand moderate outflows, Bahrain and Qatar have the largest net external debt positions and may require government or regional support under worsening conditions. Shipping companies are already facing sharp increases in war-risk insurance premiums—sometimes rising by up to 50%. Airlines, tourism operators, and logistics firms are also under pressure amid airspace closures and operational disruptions. Real estate markets may see lower transaction volumes and declining prices due to weakened investor sentiment. Meanwhile, insurers remain relatively stable thanks to capital buffers, though prolonged conflict could squeeze profitability despite standard war-risk exclusions. Four Escalation Scenarios S&P outlined four stress levels: Limited, temporary effects from energy price volatility. Direct but manageable financing and tourism impacts. Significant short-term pressure on capital flows and supply chains. A “severe” scenario involving major oil production disruption, capital flight, and long-term investment setbacks. The agency said the current environment aligns with the “severe” scenario, assuming prolonged conflict involving regional and non-regional actors and continued attacks on trade routes. Kuwait’s Non-Oil Sector Shows Strength Despite geopolitical risks, Kuwait’s non-oil private sector continues to expand. The Purchasing Managers’ Index (PMI) rose to 54.5 in February 2026, up from 53 in January, marking the strongest improvement in 15 months. Growth was driven by sharp increases in production and new orders, with export orders accelerating. Companies cited improved product quality, competitive pricing, and stronger marketing efforts. Employment expanded for the 12th consecutive month, though at a modest pace. Input cost inflation reached a nine-month high, driven by higher prices for materials, maintenance, rent, salaries, and spare parts. However, competitive pressures kept selling price increases limited. Business optimism reached a 26-month high, reflecting confidence in product diversification and demand momentum. Moody’s Assessment Separately, Moody’s Investors Service noted that while Saudi Arabia and the UAE have partial export alternatives to Hormuz via pipelines, they cannot fully replace Strait volumes. Moody’s said Bahrain, Kuwait, Qatar, and Iraq face financial pressure due to export dependence on Hormuz. However, pressures would be less severe for Qatar, Kuwait, and Abu Dhabi because of their large financial reserves. The agency’s baseline scenario assumes a relatively short conflict lasting weeks, after which navigation through the Strait would resume — limiting credit impact. However, a prolonged disruption could trigger sustained oil price increases, widen credit spreads in high-yield markets, increase refinancing risks, and complicate global monetary policy paths. Overall, while Kuwait remains exposed to geopolitical and oil market volatility, its substantial sovereign assets provide a critical financial cushion against severe external shocks.