Israel downgraded by S&P Global just ahead of retaliatory attack on Iran

By Barbara Kollmeyer

'Heightened geopolitical risk,' says ratings agency

Hours before tensions appeared to ratchet up again between Iran and Israel, the latter's long-term credit rating was downgraded by S&P Global Ratings.

S&P dropped Israel's sovereign credit rating by one notch to A+ from AA-, with the outlook negative, in a note that published late Thursday.

"In our view, the recent increase in confrontation with Iran heightens already elevated geopolitical risks for Israel. We expect a wider regional conflict will be avoided, but the Israel-Hamas war and the confrontation with Hezbollah appear set to continue throughout 2024-versus our previous assumption of military activity not lasting more than six months," said a team of S&P analysts led by Maxim Rybnikov, in a note late Thursday.

In the early hours of Friday, Iran fired air defenses at a major air base and a nuclear site near Isfahan after spotting drones, which some feared could be a retaliatory strike by to a drone and missile attack by Iran last weekend. The latest development sent crude prices (CL00) rising and pressured global stock markets.

Stock Market Today: Dow futures lower after Israel attack on Iran

Rybnikov and his team had said their updated forecast on Israel assumed "no substantial continuing direct confrontation with Iran and no broader instability in the West Bank."

The analysts predicted higher spending on defense will drive Israel's general government deficit to widen to 8% of gross domestic product in 2024. They expect higher deficits over the medium term, with the net general government debt peaking at 66% of GDP in 2026.

"A wider regional conflict, which is not our baseline scenario, could have a further material negative impact on Israel's security situation and, consequently, its economic, fiscal, and balance-of-payments parameters," said the analysts.

They warned that further downgrades were possible if current conflicts continue to widen, increasing security and geopolitical risks for Israel, which has been locked in a war with Hamas since last October. And another cut could come in the next 12 to 24 months if the impacts of those conflicts prove a bigger hit to the country's finances and growth than they expect. The agency's next review is May 10.

Moody's Investors Service had downgraded Israel's credit rating, also by one notch, in February and moved its own outlook to negative, citing the ongoing conflict with Hamas.

Israel's TA-35 stock market index IL:TA35, which is closed on Fridays, has gained 2.5% so far this year, but has lost 4.8% in the current quarter.

The dollar (USDILS) has gained 5% vs. the Israeli shekel this year.

-Barbara Kollmeyer

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04-19-24 0315ET

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