Moody's downgrades Bahrain and Iraq’s credit outlook to negative

Credit ratings agency Moody’s downgraded both Bahrain’s and Iraq’s outlooks to negative from stable on Friday, ringing alarm bells over possible credit deterioration for both countries. The two countries’ long-term ratings were also affirmed — Bahrain at B2 and Iraq at Caa1 — in junk territory. The agency cited oil exports disruptions (plus aluminum for Bahrain) as the regional war slows Hormuz flows to a trickle. For both Iraq and Bahrain, Moody assesses that an upgrade in the near term is “unlikely.”

In numbers: Iraq saw its oil exports decline to 600k bbl /d from around 3.6 mn bbl /d before the conflict. Crude production also fell nearly 61% in Iraq and around 50% in Kuwait and Bahrain as storage fills up during the Hormuz blockage.

Zero fiscal margin for error: Bahrain entered 2026 with a debt-to-GDP ratio already hovering at an unsustainable 147%. While Iraq boasts healthy reserves (USD 73 bn, excluding gold), the country is painfully dependent on the hydrocarbons sector, which accounts for half of the country’s GDP and 90% of its revenue — making current export rates unsustainable fiscally.

With no oil revenues and limited access to affordable debt, both countries’ spending drives could be at least partly derailed. Iraq is looking at big capex infrastructure investments in roads, rail, and ports as part of its Development Road Project that aims to leverage the country as a transit hub.

REMEMBER- It would take two years for oil and gas production in the region to go back to pre-war levels. And it could take four to five months for heavier crude fields in Kuwait and Iraq, extending the shock into the summer. Moody’s agrees with this sentiment: “Even under a scenario in which the ceasefire were to be sustained, we expect it will likely take some time for flows through the strait to return to normal.”