The international credit rating company S&P has announced a change in Israel's rating forecast from "stable" to "negative". This update was accompanied by the reconfirmation of Israel's credit rating at AA- level. According to S&P, this change in the rating forecast is primarily due to the significant deterioration in the geopolitical and security risks faced by Israel following the attack by Hamas on October 7.
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S&P acknowledges the difficulty in predicting the future direction of events but states their base scenario assumes the military conflict will remain focused on the Gaza Strip and not expand to other areas, such as the northern front with Hezbollah.
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Things not going according to plan, Netanyahu and Smotrich
(Photo: Reuters/Amir Cohen)
The company suggests that the credit rating may be downgraded if the military conflict significantly expands, leading to heightened security and geopolitical risks for Israel. Additionally, there is a possibility of a downgrade within the next 12-24 months if the impact of the military conflict on Israel's economic growth, fiscal situation, and balance of payments exceeds the current expectations of the company.
While S&P does not predict an all-out war between Israel and Hezbollah just yet, they do estimate an overall reduced showing of the Israeli economy, a prediction that doesn't seem far fetched, particularly as tens of thousands of employees are being placed on leave without pay. The harm to Israeli economy will manifest in the following ways:
• The ongoing rocket fire and resulting logistical disruptions have a direct negative economic impact, leading to a reduction in economic activity in the economy.
• There is a decrease in the labor force and additional costs for the government after the mobilization of over 300,000 reservists, representing 3% of Israel's population.
• The continued shutdown of gas production in the Tamar gas field due to its proximity to Gaza.
• A negative impact on the Israeli tourism industry due to the security situation and the suspension of air transportation routes.
• Indirect effects resulting from the expected decrease in local investment and the flow of foreign direct investment.
Moody's equally concerned
The company acknowledges in its announcement that the release of this statement deviates from the usual schedule for publishing rating announcements, attributable to the significant rise in geopolitical and security risks across Israel, which greatly impacts the company's forecasts for Israel's economic and fiscal performance. The next rating announcement is scheduled to be published on November 10, 2023.
It is worth noting that last week, Moody's, another rating agency, unexpectedly published a comprehensive report on the economic situation resulting from the ongoing war in Israel. Moody's announced that it has placed the credit rating of the State of Israel, currently rated at A1, under review for a potential downgrade.