In a historic move, Israel's credit rating has been downgraded from AA- to A+ by S&P Global Ratings, citing increased geopolitical risks in the region. This marks the first time the country has received a sovereign downgrade.
The downgrade places Israel on the same level as Bermuda and China, with the outlook on the rating remaining negative. S&P highlighted the escalation of tensions with Iran as a key factor contributing to the heightened risks for Israel.
Despite not predicting a wider regional conflict as the primary scenario, S&P warned that such an event could significantly worsen Israel's security situation, affecting its economy, fiscal health, and balance-of-payments metrics.
Following the outbreak of conflict with Hamas, all three major rating agencies have issued cautionary statements regarding Israel's creditworthiness. S&P was the last to adjust its outlook to negative, echoing concerns raised earlier by Fitch Ratings and Moody’s Investors Service.
The situation has intensified since Iran's drone and missile attacks on Israel in early April, a retaliation for an Israeli strike in Syria. The anticipation of further Israeli countermeasures adds to the region's instability.
S&P projects that Israel's general government deficit will expand to 8% of GDP in 2024 due to increased defense expenditures. The agency also expects the deficit to remain elevated in the medium term, with net government debt peaking at 66% of GDP by 2026.
Since the beginning of Hamas's attacks, the Israeli shekel has experienced its longest decline streak since 1984. The cost of insuring against potential losses has surged, indicating market concerns over the ongoing conflict despite central bank efforts to stabilize the currency.
