S&P May Maintain Israel’s Rating Despite Economic Risks and Tensions

By Aryeh Stern

Despite a forthcoming critical report from Standard & Poor’s (S&P) on the economic risks facing Israel, a downgrade of the nation’s credit rating appears unlikely. This optimistic forecast follows recent virtual discussions between prominent figures in the Israeli economy and representatives from the leading international credit rating agency.

During these meetings, concerns about the current economic downturn and increasing tensions in the Middle East were discussed. Nevertheless, S&P has reaffirmed its confidence in Israel’s ability to manage its debt, provided the national budget deficit remains within acceptable limits.

S&P, which has been evaluating Israel’s financial status for 25 years, has historically given the country a favorable rating. In contrast, Moody’s has recently downgraded its rating, while Fitch has shifted its outlook from stable to negative, signaling a potential downgrade in the coming months if economic conditions worsen.

The current budget deficit, at approximately 6.6%, has not yet triggered alarm at S&P. However, some analysts express concerns that excessive government spending could necessitate severe adjustments like tax increases and budget cuts in 2025. These measures could potentially lead to the closure of government offices and layoffs in the public sector.

Analysts have also criticized the budget’s emphasis on supporting non-productive sectors at the expense of investments in areas that could boost economic growth. Moreover, S&P has pointed out the growing segment of younger individuals lacking basic education, which could place additional strain on future budgets.

As the May 10 release of S&P’s assessment nears, Israel finds itself at a crucial crossroads. While initial indications suggest that S&P may avoid downgrading Israel’s credit rating, the situation remains fluid and heavily influenced by the ongoing tensions between Israel and Iran. S&P analysts continue to engage with key economic stakeholders in Israel and closely monitor the conflict with Tehran. Any escalation could prompt a swift downgrade, whereas de-escalation might yield a more favorable review, acknowledging the resilience of Israel’s economy amidst challenges like the Gaza war and border tensions with Lebanon.

However, S&P is expected to include cautionary advice in its upcoming report, highlighting areas of concern and potential vulnerabilities. A significant factor that could sway a negative adjustment is the possibility of an Israeli operation into Rafah. The next few weeks will be pivotal in determining Israel’s economic standing on the global stage.