Israel pays heavy price for escalating tension with Iran, S&P cuts credit rating, gives negative outlook

Heightened conflict with Iran last weekend and increased geopolitical tensions in the region are turning out to be very costly for Israel, that too in a big way. Rating agency S&P Global has cut Israel’s long-term ratings to A-plus from AA-minus.

“We forecast that Israel’s general government deficit will widen to 8 per cent of GDP in 2024, mostly as a result of increased defence spending,” S&P Global said in a statement.

What does a negative rating for Israel mean?

S&P’s credit rating or a sovereign rating is a score given to a country based on how the agency foresees the country’s ability to pay back the debt it has accrued.

The negative rating will also give investors an idea of how risky it could be to invest in a particular country, in this case Israel.

“In our view, the recent increase in confrontation with Iran heightens already elevated geopolitical risks for Israel,” a team of S&P analysts led by Maxim Rybnikov said.

“We expect that while a wider regional conflict will be avoided, the Israel-Hamas war and the confrontation with Hezbollah is set to continue throughout 2024 — versus our previous assumption of military activity not lasting more than six months,” the agency further said.

In the early hours of Friday, Iran deployed its air defences at a major air base and a nuclear site near Isfahan after spotting drones. Many people feared that it could be a retaliatory strike by Israel in response to a drone and missile attack by Iran last weekend.

S&P Global further said its updated forecast on Israel assumed that Israel won’t be “continuing a direct confrontation with Iran,” and that there would be “no broader instability in the West Bank."

Israel’s deficit to widen

Meanwhile analysts predict that higher spending on defence will widen Israel’s general government deficit to 8 per cent of its gross domestic product in 2024. It also expects higher deficits over the medium term, with the net general government debt peaking at 66 per cent of GDP in 2026.

“A wider regional conflict, which is not our baseline scenario, could have a further material negative impact on Israel’s security situation and, consequently, its economic, fiscal, and balance-of-payments parameters,” analysts said.

Earlier in April, Fitch removed Israel from “rating watch negative” and kept its A-plus rating. It cited Israel’s conflict against Hamas in Gaza as a risk.

In February, Moody’s too, had downgraded Israel’s credit rating over the risk of a war.

With inputs from agencies