S&P Joins Moody’s In Downgrading Israel On Geopolitical Risk
S&P cut the rating by one notch to A+, the fifth highest level and on par with Bermuda and China.
(Bloomberg) -- Israel was downgraded by S&P Global Ratings, which joined Moody’s Investors Service in lowering the nation’s sovereign credit score as geopolitical risks in the Middle East escalated.
S&P cut the rating by one notch to A+, the fifth highest level and on par with Bermuda and China. The outlook remains negative, and the rating will be reviewed again on May 10, S&P said in a statement.
The decision came hours before Israel launched a retaliatory strike on Iran, less than a week after Tehran unleashed a rocket and drone barrage, according to two US officials, raising fears of a widening conflict across the region. An explosion was heard early Friday in Iran’s central city of Isfahan, the country’s semi-official Fars news agency reported.
“The recent increase in confrontation with Iran heightens already elevated geopolitical risks for Israel,” S&P said. A wider regional conflict will likely be avoided, but the Israel-Hamas war appears set to continue throughout 2024, versus a previous assumption that military activity wouldn’t last more than six months, it said.
All three major rating firms have put out warnings on Israel’s credit score since the onset of the war with Hamas in October, which is draining the nation’s coffers. Moody’s gave the nation its first-ever sovereign rating downgrade in February, assigning it the sixth-highest investment-grade score.
The rating downgrade may add pressure on Israel’s bonds and the shekel, which has fallen almost 5% this year against the dollar. The cost of hedging against losses in the shekel has jumped as traders brace for a possible escalation of the conflict, undaunted by the central bank’s resolve to defend the currency.
“Now that geopolitical relations have broadened and worsened, and the war budget likely to be in place for an extended period of time, the one-notch downgrade and retaining the negative outlook is more than justified,” said Brendan McKenna, an emerging-markets economist and currency strategist at Wells Fargo & Co. in New York.
Israel’s 10-year bond yields are likely to rise toward 5% and the shekel will face pressure on the back of the downgrade, he said.
S&P forecast that Israel’s general government deficit will widen to 8% of gross domestic product in 2024, mostly due to higher defense spending. Bigger shortfalls are likely to to persist over the medium term and net general government debt is set to peak at 66% of GDP in 2026, the ratings firm said.
Israel’s balance of payments remains a key strength, driven by decades of current-account surpluses, S&P said.
(Updates with reports of Israel’s retaliatory strike on Iran in third paragraph. A previous version of the story was corrected to remove reference to this being the first-ever downgrade.)
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