"Israel's sovereign credit rating could be cut if the war with Palestinian Islamist group Hamas expands to other fronts, but if this does not happen it should be able to weather the war's economic fallout if it makes needed budget changes to offset higher spending," an S&P Global Ratings director told Reuters today.
In October, international ratings agency S&P affirmed Israel’s AA- sovereign rating, but downgraded the rating outlook from "Stable" to "Negative" because of the outbreak of war, and warned that if the fighting spread, this could harm Israel’s economy.
"The negative outlook on the ratings implies that we currently see at least a one-in-three chance of a downgrade over the next one to two years," Maxim Rybnikov, director of EMEA Sovereign & Public Finance Ratings at S&P, told Reuters.
Rybnikov said that a downgrade could happen for two main reasons. One was a rise in geopolitical risk, in the event of a direct confrontation with Hezbollah in Lebanon or with Iran. The second was Israel’s economic situation after the war. "We could also lower the ratings if the impact of the conflict on Israel's economic growth, fiscal position, and balance of payments proves more significant than we currently project," Rybnikov said.
S&P currently projects just 0.5% growth for the Israeli economy in 2024, and a rise in the fiscal deficit as a proportion of GDP in 2023-2024 to 10.5%.
"There are downside risks to these assumptions," Rybnikov said. "Given Israel’s other credit characteristics, a temporary deterioration in the fiscal position can be weathered. However, if ... the budgetary position turned out to be persistently weaker beyond 2024, without offsetting measures, this could erode Israel’s fiscal room to maneuver. It is already clear that defense spending will be higher in the years to come and the longer-term impact of the war on FDI (foreign direct investment) flows, investor sentiment and other areas remains uncertain. A persistent, as opposed to temporary, increase in net general government debt without offsetting measures could pose risks. That’s one of the reasons why the ratings are currently on a negative outlook," he added to Reuters.
Published by Globes, Israel business news - en.globes.co.il - on January 29, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.