Israel’s Credit Outlook Downgraded by S&P Amid Gaza Conflict

S&P Global Ratings, one of the world’s leading credit rating agencies, has revised its outlook on Israel’s sovereign debt from stable to negative, citing the ongoing war with Hamas in Gaza and its impact on the economy and security situation. The agency also reaffirmed Israel’s AA- ratings, which are among the highest in the world.

S&P expects 5% contraction in the fourth quarter

According to S&P, the Israeli economy will shrink by 5% in the fourth quarter of 2023, compared to the previous quarter, before rebounding in early 2024. The contraction will be caused by security-related disruptions, reduced business activity, the mobilization of large numbers of reservists, a shutdown in the tourism sector, and a broader confidence shock.

Israel’s Credit Outlook Downgraded by S&P Amid Gaza Conflict
Israel’s Credit Outlook Downgraded by S&P Amid Gaza Conflict

The agency also noted that the fiscal deficit will widen to 9.5% of GDP in 2023, up from 8.6% in 2022, as a result of higher defense spending and lower tax revenues. The public debt ratio will increase to 84% of GDP in 2023, from 79% in 2022.

S&P said that it expects the government to resume its fiscal consolidation efforts once the security situation stabilizes, and to reduce the deficit to 4.5% of GDP by 2025. The agency also projected that the economy will grow by an average of 3.5% per year from 2024 to 2026, supported by strong domestic demand, innovation, and external trade.

S&P warns of risks of wider conflict

S&P said that it believes that the military conflict between Israel and 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. The agency also said that it could lower Israel’s ratings if the conflict escalates or persists for a prolonged period, or if it leads to a deterioration of Israel’s relations with its regional partners or key allies.

On the other hand, S&P said that it could revise the outlook back to stable if the conflict is resolved quickly and peacefully, and if the government implements credible fiscal measures to reduce the debt burden and maintain macroeconomic stability.

S&P praises Israel’s resilience and innovation

Despite the negative outlook, S&P praised Israel’s resilience and innovation, which have enabled it to maintain high credit ratings amid geopolitical and security challenges. The agency highlighted Israel’s diversified and dynamic economy, its strong external position, its robust institutions and governance, and its access to global capital markets.

S&P also acknowledged Israel’s successful vaccination campaign against COVID-19, which has allowed it to reopen most of its economic activities and achieve one of the highest vaccination rates in the world. The agency said that Israel’s health care system has proven to be effective and efficient in dealing with the pandemic.

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