Rising India-Pakistan Tensions Increase Credit Risks for Both Nations

S&P Global Ratings has raised concerns about the escalating tensions between India and Pakistan, indicating that the ongoing conflict could adversely affect the credit ratings of both nations. While India maintains a ‘BBB-‘ rating with a positive outlook, Pakistan’s rating stands at ‘CCC+’ with a stable outlook. The agency anticipates heightened military actions in the coming weeks but does not foresee immediate impacts on credit ratings. S&P remains optimistic about India’s economic growth while urging both countries to prioritize de-escalation to avoid further deterioration of their fiscal metrics.

Credit Rating Implications

S&P Global Ratings has highlighted the potential risks to the credit metrics of both India and Pakistan due to their ongoing conflict. The agency has maintained India’s credit rating at ‘BBB-‘ with a positive outlook, reflecting confidence in the country’s robust economic growth. Conversely, Pakistan’s rating remains at ‘CCC+’ with a stable outlook. S&P expects that the heightened tensions could lead to significant military actions over the next two to three weeks. However, it does not anticipate immediate impacts on the credit ratings of either nation. The agency’s report emphasizes that neither country stands to gain from prolonged hostilities, as extended military engagement could hinder Pakistan’s efforts to improve its external and fiscal metrics, which are crucial for macroeconomic stability.

Military Actions and Regional Stability

In response to recent escalations, India’s military forces have conducted operations targeting terrorist facilities linked to groups such as Jaish-e-Mohammad and Lashkar-e-Taiba. This military response, dubbed ‘Operation Sindoor,’ was initiated following a tragic incident in Pahalgam where terrorists killed 26 civilians, primarily tourists. The operations included deep strike missile deployments aimed at facilities located in Pakistan and Pakistan-occupied Kashmir. Pakistani Prime Minister Shehbaz Sharif has asserted his country’s right to respond to what he describes as an “act of war” by India. Meanwhile, Pakistan’s Defence Minister Khawaja Asif has expressed a willingness to reduce tensions if India takes steps toward de-escalation. The situation remains precarious, with S&P warning that the risk of miscalculations and accidental clashes could increase, potentially leading to a significant deterioration in credit risks.

Economic Outlook Amidst Tensions

S&P Global Ratings has also revised India’s growth projection for FY26, lowering it from 6.5% to 6.3% due to uncertainties surrounding U.S. trade policies. Despite this adjustment, the agency remains confident in India’s economic resilience, which is expected to facilitate gradual fiscal improvements. On the other hand, Pakistan’s government is anticipated to prioritize economic recovery and fiscal stability amidst the ongoing tensions. S&P’s report underscores that sustained military conflict could deter international investors who are looking to reorganize their global production operations in the current uncertain economic climate. The agency warns that without significant de-escalation in the coming weeks, the downward pressures on sovereign credit support could intensify, further complicating the economic landscape for both nations.

Future Prospects and Recommendations

S&P Global Ratings has articulated its base case scenario, suggesting that the current intense military actions are likely to be temporary. The agency anticipates a shift toward a longer period of contained and sporadic confrontations. However, it stresses the importance of immediate de-escalation to mitigate the risks associated with prolonged tensions. The report indicates that both India and Pakistan would face significant challenges if hostilities continue, with potential negative impacts on their credit ratings and economic stability. As the situation develops, S&P urges both nations to prioritize dialogue and diplomatic efforts to avoid further escalation and to foster a more stable regional environment.

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