Prolonged Iran conflict poses downside risks to APAC Sovereign ratings: Fitch

Fitch Ratings has warned that Asia-Pacific Sovereign credit profiles face increased downside risks from a prolonged Iran conflict, citing the region’s heavy reliance on imported energy and exposure to potential supply disruptions through key shipping routes.

In a Fitch Wire released this week, the rating agency said a sustained escalation could trigger a negative terms-of-trade shock for most economies in the region, with spillover effects on inflation, growth and fiscal balances.

“Energy prices are the most direct transmission channel,” Fitch said, noting that a large share of oil and gas imports to Asia passes through the Strait of Hormuz, raising vulnerability to disruptions not only in crude supplies but also in fertilisers and petrochemical inputs.

Fitch’s baseline scenario assumes Brent crude remains near current levels before easing to an average of $ 70 per barrel in 2026. However, under an adverse scenario involving a three-month conflict, oil prices could average $ 128 per barrel in the second quarter of 2026 and $ 100 per barrel for the year, potentially placing some Asia-Pacific Sovereigns under rating pressure.

The agency highlighted that countries in South and Southeast Asia, including India, South Korea, Pakistan, the Philippines, the Maldives and Thailand, would be most affected due to their dependence on imported fossil fuels. In contrast, energy exporters such as Australia and Malaysia may benefit partially from higher export receipts, although Fitch does not expect any Sovereign in the region to see an overall improvement in credit profiles given broader macroeconomic pressures.

Fitch said fiscal policy is likely to play a central role in cushioning the shock, as seen during previous crises, but noted that fiscal space has narrowed across the region. Government debt levels have risen, with the median debt-to-GDP ratio projected at 50% in 2026, compared to 37.8% in 2019, while many Sovereigns continue to run deficits above pre-pandemic levels.

The report cautioned that expanded subsidies for fuel, electricity and fertiliser could delay fiscal consolidation and increase contingent liabilities, particularly where state-owned utilities absorb losses.

Beyond energy, Fitch identified additional transmission channels that could weigh on credit profiles, including currency depreciation, tighter financing conditions, and volatility in capital flows and remittances. Sovereigns with stronger external buffers, such as higher foreign reserves, are expected to be better positioned to manage these risks, while frontier markets with refinancing pressures remain more vulnerable.

Supply-side disruptions are also expected to extend beyond energy markets. Fitch noted that shipping frictions and feedstock constraints are already affecting industrial supply chains, with some Asian petrochemical producers reducing output, adding to inflationary pressures.

The agency further warned of risks to food security stemming from fertiliser supply disruptions. With China expected to maintain restrictions on phosphate fertiliser exports and the Gulf region playing a central role in global fertiliser markets, higher input costs could feed into food prices and increase subsidy burdens.

Fitch said rising living costs could heighten social pressures in more vulnerable economies, particularly in frontier markets with limited fiscal capacity to absorb shocks.