The country’s confrontation with Iran has raised geopolitical risks, S&P has said

International ratings agency S&P Global downgraded Israel’s long-term credit rating on Thursday, citing the risk of a military escalation with Iran.

S&P has become the second major US credit ratings agency to do so after Moody’s lowered Israel’s credit score in February due to the “ongoing military conflict with Hamas” in the country’s first-ever sovereign downgrade.

The agency cut Israel’s long-term foreign and local currency sovereign credit ratings to ‘A+’ from ‘AA-’ and the short-term ratings to ‘A-1’ from ‘A-1+’.

S&P explained that the negative outlook reflected the “risk that the Israel-Hamas war and the confrontation with Hezbollah could escalate or affect Israel’s economic, fiscal, and balance-of-payments parameters more significantly than we currently expect.”

The decision came hours before Israel carried out a series of strikes on Iran in the early hours of Friday. It came less than a week after Tehran fired a barrage of drones and missiles at Israel in response to a suspected Israeli strike on its consulate in Syria.

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“The recent increase in confrontation with Iran heightens already elevated geopolitical risks for Israel,” S&P said. A wider regional conflict will likely be avoided, but the Israel-Hamas war appears set to continue throughout 2024, whereas it was previously assumed that the military activity wouldn’t last more than six months, the agency said.

The ongoing war is weighing on Israel’s budget, economists have warned. The hostilities have prompted all three US credit ratings agencies – Moody’s, S&P, and Fitch – to place the country on negative ratings watch since Israel declared war on Hamas in response to a surprise attack by the militant group in October, which killed around 1,200 Israelis.

“Now that geopolitical relations have broadened and worsened, and the war budget likely to be in place for an extended period of time, the one-notch downgrade and retaining the negative outlook is more than justified,” Brendan McKenna, an economist at Wells Fargo & Co, told Bloomberg.

S&P has forecast that Israel’s general deficit will widen to 8% of gross domestic product this year, higher than the government’s estimate of 6.6% – mostly due to higher defense spending. Larger shortfalls are expected to persist over the medium term and net general government debt is set to peak at 66% of GDP in 2026, the ratings agency said.