Rising India-Pakistan Tensions Could Heighten Credit Risks: S&P

S&P Global Ratings has warned that the outbreak of hostilities between India and Pakistan has heightened regional credit risks, particularly for the two countries involved. While no immediate rating actions have been taken, the situation introduces material uncertainty that could weigh on sovereign credit profiles if tensions persist.

The credit agency’s base case anticipates that the current phase of intense military activity will be short-lived, followed by a period of contained and sporadic confrontations. Under this scenario, S&P expects no direct impact on India’s (BBB-/Positive/B) or Pakistan’s (CCC+/Stable/C) sovereign credit ratings.

However, the potential for accidental clashes or miscalculations is a key concern. S&P warns that such incidents could unintentionally escalate the conflict, significantly worsening credit conditions for both nations. “Prolonged or intensified hostilities would increase downward pressure on credit support,” the bulletin stated.

Over the next two to three weeks, tensions are expected to remain high, with the possibility of further military actions. Nevertheless, S&P foresees a likely de-escalation after this period, limiting any long-term damage to the countries' sovereign credit metrics.

India is expected to continue its strong economic growth trajectory, which supports gradual fiscal improvement. Pakistan, on the other hand, is projected to remain focused on restoring macroeconomic stability and fiscal discipline.

S&P highlights that neither country has an incentive to prolong the conflict. For Pakistan, sustained military action would derail progress on external and fiscal fronts, undermining economic recovery. For India, prolonged tensions could deter foreign investment at a time when global businesses are re-evaluating supply chains in a volatile economic environment.

While the base case remains one of limited duration and controlled escalation, S&P cautions that continued hostilities without de-escalation could intensify sovereign credit risks. The longer the conflict lasts, the greater the risk of unintended consequences that could materially impact credit ratings.