The outbreak of hostilities between India and Pakistan has increased regional credit risks, especially for the two sovereigns involved, according to the Standard and Poor’s Global Ratings agency.
In a statement, the agency said its base case is for the intense military actions to be temporary, which will give way to a longer period of contained and sporadic confrontations. In this scenario, it said, there would be no immediate impact on sovereign credit ratings on India (BBB-/Positive/B) and Pakistan (CCC+/Stable/C). Nevertheless, it added, the situation raises the specter of miscalculations and accidental clashes that could escalate well beyond the intentions of both sides. Such a scenario would materially worsen credit risks.
“We anticipate tensions to remain high over the next two to three weeks, with significant further military actions on both sides possible,” it said, adding the situation would likely de-escalate subsequently, leaving little persistent negative impact on sovereign credit metrics. “We expect India to maintain strong economic growth that allows gradual fiscal improvements to continue. We also expect the Pakistan government to remain focused on supporting the recovery of its economy and fiscal stability,” it said.
The S&P said both countries had no incentive to allow current tensions to become prolonged. “A protracted military conflict will derail the improvements to Pakistan’s external and fiscal metrics that would support a return to macro stability. For India, a prolonged military conflict will also lead to difficulty attracting foreign investors seeking to reconfigure their international production activities amid the uncertain global economic environment,” it said.
The latest situation heightens risks to sovereign credit metrics that will increase the longer current tensions persist. Accidental contacts and other miscalculations present serious risks in a state of active combat that could intensify the conflict to levels beyond the intentions of both parties. Consequently, the downward pressures on sovereign credit support will exacerbate if there is no material de-escalation in the next few weeks.