Israel’s credit outlook was cut by the last of the three major rating companies that kept it at stable, casting a fresh pall over the country’s assets as the war with Hamas ripples through the economy.
S&P Global Ratings lowered Israel’s outlook to negative on Tuesday, following similar moves by Fitch Ratings and Moody’s Investors Service. It cited risks that the conflict sparked by Hamas’s deadly attacks this month could spread and have a more pronounced impact on Israel’s economy and public finances than expected.
The decisions leave Israel facing the prospect of what would be its first ever rating downgrade. Uncertain over how geopolitical tensions will play out, investors have been turning wary of Israeli assets ahead of a likely ground invasion of Gaza.
The shekel extended its declines to a 13th day, the longest losing streak in four decades, while some of Israel’s hard-currency bonds slumped to record lows.
“The Israel-Hamas war could spread more widely or affect Israel’s credit metrics more negatively than we expect,” S&P analysts Maxim Rybnikov and Karen Vartapetov said in a statement. “We currently assume the conflict will remain centered in Gaza and last no more than three to six months.”
S&P affirmed Israel’s rating at AA-, the fourth-highest score, but warned the economy is at risk of a sharp downswing in the months ahead.
It now forecasts gross domestic product will shrink 5% in the fourth quarter from the prior three months amid disruptions related to security and reduced business activity.
Fiscal measures to support households and businesses, alongside an increase in defense spending, are set to lift the average general government deficit to 5.3% of GDP in 2023-2024, more than double S&P’s previous forecast of 2.3%.
S&P said the drafting of a large number of reservists, the halt of foreign tourism and a broader confidence shock will also hurt economic growth in the last three months of the year, before a rebound in 2024.
In a reflection of the risks facing Israel, the shekel has lost more than 6% this month, the world’s worst performance. The cost to insure government debt against default surged to the highest level in 11 years on Monday.
As the conflict with Hamas escalated, Moody’s last week put Israel’s debt rating on review for downgrade. Days earlier, Fitch also placed the nation’s credit score on negative watch.
Israel should manage to avoid having its rating cut thanks to sound finances, unless the war drags on for a long time, a top official in charge of the country’s debt has said, describing a downgrade as an extreme scenario.
--With assistance from Craig Stirling and Zoe Schneeweiss.