S&P to keep Israel's credit rating intact, but concerns over war economy linger

International rating agency set to release report highlighting risks in Israeli economy but won't downgrade rating; Fitch maintained Israel’s high rating but shifted outlook to negative, following Moody's first-ever downgrade
Despite an impending critical report from international credit rating agency S&P outlining the economic risks to Israel, a downgrade to the nation's credit rating is unlikely. This positive outlook stems from recent virtual discussions between key figures in the Israeli economy and representatives from the world's leading credit rating agency.
While concerns about the current economic downturn and escalating tensions in the Middle East were voiced during these meetings, S&P expressed confidence in Israel's ability to manage its debt, provided the national budget deficit remains within reasonable limits.
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בנימין נתניהו ובצלאל סמוטריץ' במסיבת עיתונאים
בנימין נתניהו ובצלאל סמוטריץ' במסיבת עיתונאים
Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich
(Photo: Reuters/Ronen Zvulun)
S&P, a major player in the credit rating arena with a 25-year history of evaluating Israel's financial standing, has consistently maintained a positive rating for the country.
Conversely, Moody's, another prominent credit rating agency, recently opted for a downgrade. Fitch, the third member of the "big three" rating agencies, has taken a more cautious approach, revising its outlook for Israel from stable to negative, leaving the door open for a potential downgrade in the coming months should the economic situation deteriorate further.
While the current budget deficit, hovering around 6.6%, hasn't set off any alarms at S&P, some analysts are concerned excessive expenditure would force the Israeli government to implement drastic measures such as tax hikes and spending cuts in the 2025 budget, potentially leading to closures of government offices and job losses within the public sector.
Analysts also highlighted the current budget structure, prioritizing support for non-productive sectors, such as the ultra-Orthodox community, over investments in areas that stimulate economic growth. Additionally, S&P highlights the growing segment of younger age groups lacking basic education as a potential future burden on the national budget.
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עלי חמינאי
עלי חמינאי
Another flareup with Iran could trigger a credit downgrade
As the release of S&P's assessment of Israel's economic health approaches on May 10, Israel stands at a critical juncture. Preliminary signs indicate the credit rating agency might avoid a downgrade, yet the situation is dynamic, heavily swayed by the ongoing tension between Israel and Iran.
S&P analysts are in close contact with key stakeholders in the Israeli economy, carefully monitoring the tensions with Tehran. Experts warn that any escalation of the conflict could prompt a swift downgrade of Israel’s credit rating, while a de-escalation might lead to a more positive review, recognizing the resilience of Israel’s economy amid challenges like the Gaza war and border tensions with Lebanon.
Nonetheless, S&P is expected to issue cautionary notes, pinpointing areas of concern and potential vulnerabilities. The possibility of an Israeli operation into Rafah looms as a significant factor that could influence a negative adjustment. The next few weeks are critical in shaping Israel's economic position globally.
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