The country may be downgraded if the war expands beyond Gaza, S&P has warned

Global credit rating agency S&P warned on Monday that it could cut Israel’s sovereign credit rating if the war with the Palestinian militant group Hamas expands to other fronts.  

In October, S&P maintained Israel’s ‘AA-’ rating but lowered the country’s credit outlook from ‘stable’ to ‘negative’, citing risks that the Israel-Hamas war could spill over and have a more severe impact on the economy and broader humanitarian situation in the country. 

The potential further escalation of hostilities such as a direct confrontation with Hezbollah in Lebanon or Iran, could result in a rating downgrade, according to Maxim Rybnikov, director of EMEA sovereign and public finance ratings at S&P.  

“We could also lower the ratings if the impact of the conflict on Israel’s economic growth, fiscal position, and balance of payments proves more significant than we currently project,” Rybnikov said. 

S&P expects the Israeli economy to grow by just 0.5% this year with a cumulative budget deficit of 10.5% of GDP in 2023-2024 “but there are downside risks to these assumptions.”  

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“It is already clear that defence spending will be higher in the years to come and the longer-term impact of the war on FDI [foreign direct investment] flows, investor sentiment and other areas remains uncertain,” said Rybnikov.  

S&P, however, indicated it could restore Israel’s credit outlook to ‘stable’ if the conflict is resolved, as that would mean a reduction in regional and domestic security risks.

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