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

S&P downgrades Israel's credit rating, citing heightened geopolitical risks and potential military escalation with Iran, underscoring the economic impact of the ongoing conflict.

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

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

S&P Global Ratings has lowered Israel's long-term credit rating from 'AA-' to 'A+', citing heightened geopolitical risks, including the potential for military escalation with Iran. The agency also forecasts a widening general government deficit of 8% of GDP in 2024, primarily driven by increased defense spending.

The downgrade comes after recent military strikes between Israel and Iran, with Israel carrying out limited strikes on an Iranian military air base near Isfahan in response to Iran's attack on Israeli soil the previous week. The strikes have not led to major escalation so far, with both sides seeking to lower tensions. However, the downgrade reflects concerns about the ongoing shadow war between Israel and Iran and the potential for further military conflict, which could impact Israel's economic and fiscal outlook.

Why this matters: The downgrade by S&P Global highlights the significant economic and financial risks posed by the escalating tensions between Israel and Iran. It underscores the potential for the conflict to spiral into a broader regional confrontation, which could have far-reaching consequences for stability in the Middle East and beyond.

S&P emphasized that its current prediction does not assume a wider regional conflict, but it sees several possible military escalation risks, including a more substantial confrontation with Iran. The outlook will be updated to stable if the risk of escalation decreases and security risks moderate. The downgrade is a direct response to Iran's missile attack on Israel, according to the Accountant General.

S&P also praised the Israeli economy's ability to withstand economic and geopolitical shocks, while other rating agencies like Fitch and Moody's have also recently downgraded or revised Israel's credit outlook negatively. The negative outlook from S&P suggests that Israel may face further challenges in meeting its financial commitments and economic stability in the future, as the uncertainty surrounding the situation in the Middle East and the potential for escalation of military conflicts will likely continue to weigh on the country's credit standing and economic outlook.

The cost of war has placed a significant strain on Israel's budget, leading all three major U.S. credit ratings agencies to issue warnings about the country's credit standing. S&P believes that the Israel-Hamas war and confrontation with Hezbollah will continue throughout 2024, contrary to their previous assumption of military activity not lasting more than six months.

Key Takeaways

  • S&P downgrades Israel's credit rating from 'AA-' to 'A+' due to heightened geopolitical risks.
  • Increased defense spending and potential for military escalation with Iran drive wider fiscal deficit.
  • Tensions between Israel and Iran pose significant economic and financial risks for Israel.
  • Other rating agencies also downgrade or revise Israel's credit outlook negatively.
  • Cost of war strains Israel's budget, with prolonged conflicts expected throughout 2024.