S&P Global on Thursday cut Israel’s long-term ratings to A-plus from AA-minus, noting, “We forecast that Israel’s general government deficit will widen to 8% of GDP in 2024, mostly as a result of increased defense spending. … We currently see several possible military escalation risks, including a more substantial, direct, and sustained military confrontation with Iran.”
Earlier this month, Fitch lifted Israel from “rating watch negative,” maintaining its A-plus rating. However, the agency highlighted Israel’s conflict with Hamas in Gaza as a potential risk factor.
In February, Moody’s lowered Israel’s credit rating due to concerns over war risks. Israeli Finance Minister Bezalel Smotrich criticized the decision, arguing it lacked solid economic rationale and likened it to a pessimistic “manifesto.”
The S&P report, published before the latest reports on an Israeli attack in Iran, said, “We currently see several possible military escalation risks, including a more substantial, direct, and sustained military confrontation with Iran. Israel is under international pressure to restrain its response to the April 13 attack, while Iran has announced its intention not to escalate. However, in our opinion, there remain risks of an accident or miscalculation, especially if there are more exchanges of fire between the two sides. … Expansion of the current conflicts might present additional defense and social risks for Israel, which could affect a range of economic and fiscal indices, in contrast to our basic scenario.”
Highlighting the positive, S&P noted Israel’s financial robustness, pointing to its access to global capital markets, current account surplus, robust net external asset position, substantial foreign exchange reserves as of last month, and bonds worth $8 billion issued across different terms (five, ten, and 30 years). Israel’s heavy reliance on high-tech exports was seen as advantageous, with S&P suggesting it’s unlikely to face significant harm.
On the negative side, S&P views critically Israel’s heavy reliance on US financial support, which can be read as a warning that a change in the relationship between the two countries over a difference of opinions on the ongoing Gaza war, on Hezbollah, or on Iran, could result in a substantial blow to Israel’s economy.
S&P predicts that Israel’s 2024 economic growth will not be above 0.5%, compared with 2% in 2023.
