Ratings agency S&P has published a survey of the Israeli economy after downgrading the country's credit outlook last month. The survey opens, "Israel faces significant geopolitical and security risks with the scenario of the war escalating to other regions remaining possible, although it is not the main scenario in its forecasts.
In terms of impact on the Israeli economy, S&P sees GDP growth of 1.5% in Israel in 2023 and 0.5% in 2024. The company's annual forecasts represent a sharp contraction of 5% in GDP in the fourth quarter of 2023, compared with the third quarter, with all expenditure components reduced, including domestic demand, exports and imports. The contraction stems from a fall in business activity, a fall in demand from both consumers and a very uncertain investment environment."
S&P sees a fiscal deficit of 5.3% of GDP in 2023 and 2024, up from its previous forecast before the war of 2.3%. Although the ratings agency sees war expenditure decreasing, S&P says that defense expenditure will remain high in the medium term.
On the political front, S&P observes that support for Prime Minister Benjamin Netanyahu has fallen significantly following the unexpected Hamas attack last month and consequently the judicial reform being promoted by the coalition government will probably be suspended indefinitely.
After the war, S&P sees, "Gradual economic recovery s that by the end of 2024, the economy will have returned to its pre-war levels. Consequently, the company expects accelerated growth that will reach 5% in 2025, together with restored consumer confidence and full levels of investment."
S&P explains that an actual cut in Israel's credit rating in the next 12-24 months is only likely if the influence of the conflict on economic growth, the fiscal situation and Israel's balance of payments are more significant than the company expects, or if the conflict expands substantially and will increase the security and geopolitical risks that Israel faces.
In the positive scenario, S&P says it could restore Israel's credit outlook from negative to stable if the conflict is resolved, amid a reduction in regional security and internal risks with no long-term burden on the Israeli economy and public spending.
Two weeks after the start of the war, S&P cut Israel's credit outlook from stable to negative but reaffirmed its AA- credit rating. Ratings agencies Moody's and Fitch have both put Israel on review for a downgrade.
Published by Globes, Israel business news - en.globes.co.il - on November 14, 2023.
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