Middle East credit outlook holds steady amid global strains

Sovereign credit prospects across the Middle East are set to remain stable through 2026, underpinned by resilient economic fundamentals, disciplined fiscal management and sizeable financial buffers, even as the region navigates elevated geopolitical tensions and softer oil prices, according to an assessment by S&P Global Ratings.

The ratings agency points to strong government balance sheets and a steady expansion of policy flexibility as key factors insulating most sovereigns from external shocks. Hydrocarbon exporters continue to benefit from years of fiscal consolidation, while several non-oil economies have strengthened their credit profiles through reforms that broaden revenue bases and deepen local capital markets.

Oil prices have retreated from the peaks seen earlier in the decade, trimming headline fiscal surpluses for producers. Yet S&P’s analysis suggests that lower breakeven prices, accumulated reserves and conservative debt levels are allowing governments to absorb the adjustment without significant pressure on sovereign ratings. Many states entered this period with sovereign wealth funds and foreign currency reserves that provide a cushion against volatility in global markets.

The outlook reflects a region that has used earlier windfalls to reduce vulnerabilities. Public debt ratios remain comparatively low across much of the Gulf, and refinancing risks are contained due to long maturities and access to domestic and international funding. In several cases, governments have extended yield curves, improved debt management frameworks and developed sukuk and bond markets that attract a broad investor base.

Fiscal policy has also become more flexible. Medium-term budget frameworks and expenditure controls are increasingly common, helping authorities adjust spending in response to changing oil revenues without undermining growth. Subsidy reforms, new taxation measures such as value-added tax, and improved fee collection have diversified income streams and reduced reliance on hydrocarbons.

Beyond oil, economic diversification remains a central theme in the credit story. Large-scale investments in manufacturing, logistics, tourism, renewable energy and technology are gradually lifting non-oil growth and employment. These initiatives support domestic demand and enhance resilience to commodity cycles, a trend that S&P views as credit-positive over the medium term.

Geopolitical risk remains a prominent constraint. Ongoing regional conflicts and heightened security concerns can weigh on investor sentiment, disrupt trade flows and raise risk premiums. However, the ratings agency notes that direct fiscal and economic spillovers have been limited so far, and most governments retain the capacity to respond if conditions deteriorate.

Global financial conditions present another test. Higher-for-longer interest rates in advanced economies have increased borrowing costs worldwide, yet Middle Eastern sovereigns have been relatively insulated due to modest financing needs and ample liquidity. For issuers tapping international markets, strong demand has allowed orderly issuance, often at spreads that compare favourably with peers in other emerging regions.

Currency regimes also play a stabilising role. Pegged exchange rates in several economies provide nominal anchors that help manage inflation and support financial stability, backed by sufficient reserves. Where currencies are more flexible, external positions have improved, reducing vulnerability to capital flow reversals.

S&P highlights differences within the region. Wealthier hydrocarbon exporters with large sovereign assets enjoy the strongest buffers, while lower-income or conflict-affected states face more fragile outlooks due to weaker institutions, higher debt burdens or constrained access to financing. For these countries, progress on structural reforms and political stability will be critical to any improvement in credit standing.

Banks and government-related entities are closely linked to sovereign creditworthiness. Well-capitalised banking systems, supported by prudent regulation, continue to anchor financial stability and provide funding for economic projects. Government-related companies benefit from implicit or explicit support, though their leverage and investment plans are increasingly scrutinised for potential contingent liabilities.