S&P flags Pakistan as most exposed APAC economy in prolonged Middle East war

ISLAMABAD: S&P Global Market Intelligence has identified Pakistan as the Asia-Pacific economy facing the highest macro-financial stress risk under a scenario of prolonged conflict in the Middle East, according to its latest assessment of major regional economies.

Pakistan’s real GDP growth is projected to slow to 3.2% in fiscal year 2027, with risks skewed to the downside mainly because of the ongoing war in the Middle East. The country’s vulnerability is being amplified by its near-total dependence on crude supplies from the Gulf, reliance on workers’ remittances from Gulf Cooperation Council countries, sizeable external financing requirements and limited fiscal room.

Ahmad Mobeen, Principal Economist at S&P Global Market Intelligence, said Pakistan was likely to face the sharpest impact among major APAC economies if the conflict persists. "Our assessment of major APAC economies shows that Pakistan is likely to experience the most acute effects of a prolonged Middle East war shock due to its high dependence on imported energy and industrial inputs from the region, combined with improving but still limited external and fiscal buffers. Higher energy prices are likely to reverse recent gains on the current account, increase depreciation pressures, and keep inflation elevated. While the initial policy responses helped temporarily mitigate the supply shock and slow the pass-through to households and businesses, the next policy phase is likely to be defined by increasingly difficult trade-offs between maintaining stability, supporting growth, and continuing fiscal consolidation measures under existing IMF programmes without additional bilateral and multilateral funding," he said.

Pressure on growth and key sectors

The assessment said rising energy prices, supply chain bottlenecks and disruptions to trade routes are expected to put pressure on manufacturing activity and export growth, while also increasing inflation in imported industrial inputs.

It also highlighted the possibility of fertiliser shortages and slower remittance growth, saying both factors could directly affect farm incomes and crop output. Second-round effects from energy inflation are also expected to squeeze private consumption and spill into the services economy, with transport and retail seen as particularly vulnerable.

External financing risks remain high

S&P said Pakistan’s external financing outlook remains difficult despite some near-term improvement in buffers. Support had come from a new Saudi deposit, expected rollovers of existing facilities, and continued access to bilateral and multilateral financing linked to IMF programmes.

Even so, refinancing risks remain elevated. It pointed to the recent $3.5 billion repayment to the UAE as an indication of the scale of debt servicing obligations ahead. Market Intelligence projected Pakistan’s gross external financing needs at around $24 billion a year on average during the 2026-30 period.

The assessment presents Pakistan as particularly exposed to any prolonged regional instability because of the combined effect of energy dependence, remittance exposure, financing needs and constrained fiscal capacity.