The US credit rating agency Standard & Poor’s, the largest of the big three credit-rating agencies (the others are Moody’s and Fitch), on Tuesday, revised its outlook on Israel’s sovereign debt to negative––from stable, and confirmed Israel’s AA- rating.
According to the agency, Israel’s war against Hamas “will remain centered in Gaza, but there are risks that it could spread more widely with a more pronounced impact on the economy and security situation in Israel.”
S&P believes that with more than 300,000 Israeli wage earners plucked from economic activity to defend their country on two borders, Gaza and Lebanon, the Israeli economy is likely to shrink by 5% in the fourth quarter of 2023, compared with the third quarter, or, in Bankers’ language: “The contraction will stem from security-related disruptions and reduced business activity.”
But S&P also expects Israel’s economy to rebound in the first quarter of 2024, predicting that the war will last no more than six months. However, according to the agency, should the war be prolonged or spread to additional fronts, all bets are off.
At this point, the statement is only an alert, and Israel’s AA- rating remains intact, but the outcome of the war may result in downgrading Israel to A-.
By the end of 2023, S&P predicts that Israeli GDP will grow by 1.5% compared to last year because the contraction of the economy will not completely offset the growth in the first three quarters. Things will be dimmer in 2024 when the Israeli economy will grow by only 0.5%. However, in 2025, growth will accelerate to 5%.
S&P expects the Israeli government’s deficit to jump to 5.3% of GDP on average in 2023 and 2024, compared to 2.3% in the previous forecast.
Moody’s and Fitch announced last week that they would reexamine the Israeli government’s credit rating. The two agencies’ current rating of Israel is only A+, compared with S&P which raised it to AA- in 2018.
It should be noted that even without an actual downgrading of its credit rating, the Israeli government will start paying higher interest rates on new loans, further encumbering an already stretched economy in time of war.
