Sovereign Credit Rating of Israel Downgraded Amid Escalating Geopolitical Risks

Key Takeaway

• S&P downgrades Israel's credit rating from AA- to A+ due to heightened geopolitical risks, aligning it with Bermuda and China.
• The downgrade reflects concerns over regional conflict impact on Israel's economy, with a projected government deficit widening to 8% of GDP by 2024.
• Escalating tensions with Iran and the economic strain from increased defense spending contribute to the negative outlook and shekel pressure.

Sovereign Downgrade Amid Geopolitical Tensions

Israel has experienced its first-ever sovereign credit rating downgrade by S&P Global Ratings, moving from AA- to A+, a decision influenced by the escalating geopolitical risks in the region, particularly the increased confrontations with Iran. This adjustment places Israel's rating on par with Bermuda and China, with a continued negative outlook. The downgrade reflects concerns over a potential wider regional conflict, which, while not the baseline scenario for S&P, could significantly impact Israel's security, economy, fiscal health, and balance of payments.

Economic and Fiscal Implications

The downgrade comes amid warnings from all three major rating firms regarding Israel's credit score since the war with Hamas began. S&P's analysis suggests that Israel's general government deficit is expected to widen to 8% of GDP in 2024, largely due to increased defense spending. This financial strain is anticipated to persist, with net general government debt projected to peak at 66% of GDP by 2026. The shekel has faced significant pressure, marking its longest streak of declines since 1984, as traders anticipate the next phase of the conflict, despite the central bank's efforts to stabilize the currency.

Regional Tensions and Market Reactions

The intensification of regional tensions, especially following Iran's drone and missile barrage on Israel in retaliation for a strike in Syria, has put the spotlight on the potential for an all-out war. This geopolitical instability has not only affected Israel but also its neighbors, with Egypt experiencing a downgrade in its sovereign credit rating by S&P due to the war's expected impact on its economy. The conflict has led to a reduction in Egypt's gas imports from Israel, highlighting the broader economic repercussions of the ongoing hostilities.