Iraq and UAE hold sovereign credit ratings

Iraq caught a small break from S&P this week, while the UAE held its top-tier rating from Moody’s. The two updates capture how unevenly the war is rolling through the MENA+ region, with one country struggling with oil dependence and fiscal fragility, and the other benefiting from sovereign-asset depth and Hormuz-bypass options.

S&P Global Ratings affirmed Iraq’s long-term sovereign credit rating at B- and pulled the Opec producer off its high-alert CreditWatch Negative list, where it sat since March. The agency maintained a negative outlook on Iraq’s long-term rating, signaling that structural fiscal risks remain deep.

The ratings are supported by Iraq’s large foreign reserves, which remain close to USD 100 bn and provide significant protection against external shocks, but Iraq’s economy has been hit hard because it depends heavily on oil, which provides about 90% of government revenue and exports. Disruptions through the Strait of Hormuz caused oil production to collapse in early 2026, and S&P expects average production this year to be about 28% lower than in 2025. As a result, Iraq’s real GDP is forecast to shrink by more than 15% in 2026, while budget and external balances remain under pressure despite higher oil prices.

The removal from CreditWatch offers short-term breathing room for Iraqi debt and trade finance instruments. However, the persistent negative outlook underscores the country’s vulnerability to volatile oil markets and a heavily bloated public sector wage bill. We recently took a deep dive into Iraq’s fiscal crisis and how its new Prime Minister Ali Al Zaidi may need to rely on an IMF bailout just to make payroll.

S&P’s negative outlook warns that a downgrade is still very much on the table if prolonged low oil prices or further regional instability drain Iraq’s fiscal buffers faster than anticipated. S&P expects oil exports and production to gradually recover in 2H 2026, helping economic conditions improve in 2027.

Moody’s keeps the faith in the UAE

Moody’s affirmed the UAE’s Aa2 sovereign credit rating with a stable outlook despite ongoing disruption to trade through the Strait of Hormuz, Arab News reports. The credit rating comes even as the agency expects a 7% contraction in 2026, driven by a 23% decline in hydrocarbon production and a 4% contraction in the non-oil economy, citing “disruption to trade and confidence-sensitive sectors.”

The most bearish call in the field: Goldman Sachs had projected a 5% contraction, Oxford Economics sees GDP contracting by 0.2%, and the World Bank’s latest report (pdf) puts 2026 growth at 2.4% in 2026 — down sharply from its January forecast of 5%. Moody’s expects the economy to rebound to grow at a 13% clip in 2027.

Why the rating holds anyway: Fitch also reaffirmed its AA sovereign rating for Abu Dhabi in May, and the answer for both lies in Abu Dhabi’s balance sheet. Moody’s assumes the emirate would step in if needed, noting that Abu Dhabi’s government financial assets exceeded 300% of GDP at the end of 2025. The UAE also entered 2026 with a AED 17.4 bn federal budget surplus, while federal debt is expected to remain around 3-4% of GDP. The Habshan-Fujairah pipeline lets Abu Dhabi bypass the Strait of Hormuz for part of its oil exports — with more bypass options in the works — and Moody’s expected oil at USD 90-110 / bbl this year should partially offset lower volumes.

Where the pain shows: Moody’s flagged tourism, logistics, transport, real estate, and foreign investment as sectors under pressure. The World Bank cut its global growth forecast for 2026 to 2.5% and slashed its outlook for the Middle East, North Africa, Afghanistan, and Pakistan region to 1.6%, down from 4% growth last year. The lender warned global growth could slow to as little as 1.3% if energy disruptions spill into financial markets.