Israel's Credit Rating Downgraded by S&P Global Amid Heightened Geopolitical Risks

S&P Global Ratings has downgraded Israel's long-term foreign and local currency sovereign credit ratings from AA-minus to A-plus, citing heightened geopolitical risks in the region. The ratings agency also assigned a negative outlook to the country, reflecting concerns that military conflicts with Iran, Hamas, and Hezbollah could escalate and significantly impact Israel's economic, fiscal, and balance-of-payments parameters.

The downgrade comes after a confrontation with Iran last weekend, during which Iran's Islamic Revolutionary Guards Corps launched dozens of drones and missiles at Israel. This attack has raised fears of a potential wider regional conflict that could have severe consequences for Israel's security and economy.

In addition to the tensions with Iran, the ongoing war with Hamas in Gaza and continued skirmishes with Hezbollah have contributed to the increased geopolitical risks faced by Israel. S&P Global Ratings expects the Israel-Hamas war to continue throughout 2024, contrary to previous assumptions of a shorter duration.

Why this matters: The downgrade of Israel's credit rating by S&P Global Ratings highlights the significant impact that geopolitical risks can have on a country's economic stability and borrowing costs. As tensions in the Middle East continue to escalate, the potential for a wider regional conflict poses a serious threat to Israel's security and financial well-being.

S&P Global Ratings forecasts that Israel's general government deficit will widen to 8% of GDP in 2024, primarily due to increased defense spending. The ratings agency also projects that Israel's net general government debt will peak at 66% of GDP by 2026. The downgrade may put additional pressure on Israel's bonds and the shekel, which has already fallen by almost 5% this year.

Despite the downgrade, Israel's balance of payments remains a key strength, driven by decades of current-account surpluses. However, the negative outlook assigned by S&P Global Ratings indicates that further downgrades are possible if the geopolitical situation continues to deteriorate.

The downgrade by S&P Global Ratings follows similar actions by other major credit rating agencies. Earlier this month, Fitch removed Israel from its 'rating watch negative' list but cited the war against Hamas in Gaza as a risk factor. In February, Moody's downgraded Israel's credit rating amid escalating geopolitical risks, a decision that Israeli Finance Minister Bezalel Smotrich criticized as not being based on sound economic reasoning.

Key Takeaways

• S&P downgraded Israel's credit rating from AA- to A+ due to heightened geopolitical risks.
• Tensions with Iran, Hamas, and Hezbollah could escalate, impacting Israel's economy and finances.
• S&P expects Israel's budget deficit to widen to 8% of GDP in 2024 due to higher defense spending.
• Israel's net debt is projected to peak at 66% of GDP by 2026, raising borrowing costs.
• Other agencies, like Fitch and Moody's, have also downgraded Israel's credit rating due to geopolitical risks.