S&P cuts Israel’s rating soon after Iran attack, warns of ‘delayed economic recovery’

Standard & Poor’s Global overnight downgraded Israel’s credit rating, citing intensifying fighting with the Hezbollah terror group that could drag into 2025 and accelerate the fallout on the country’s economy and public finances, and also noting Iran’s Tuesday evening ballistic missile attack on Israel.

S&P joined Moody’s in lowering the country’s sovereign rating for a second time this year. The rating agency cut Israel’s rating to ‘A’ from ‘A+’. It maintained a negative outlook as it sees risks of further escalation in the fighting with Hezbollah in Lebanon and the risk of a “more direct war with Iran.”

“We now consider that military activity in Gaza and an upsurge in fighting across Israel’s northern border – including a ground incursion into Lebanon – could persist into 2025, with risks of retaliation against Israel,” S&P said. “The latter in particular has been highlighted by a missile attack on Israel by Iran at the beginning of October.”

“A wider ground operation in Lebanon requiring a call-up of reservists could also constrain economic recovery in the short term,” S&P cautioned.

A negative outlook means that further downgrades could be in the offing “if the military conflicts become a bigger-than-anticipated detriment to Israel’s economic growth, fiscal position, and balance of payments,” the rating agency said.

The downgrade came hours after Iran fired a massive salvo of ballistic missiles at Israel on Tuesday night, sending almost 10 million people into bomb shelters as projectiles and interceptors exploded in the skies above. Following the attack, which was largely unsuccessful, Prime Minister Benjamin Netanyahu warned Tehran that it had made “a big mistake” and “will pay for it.”

Workers remove broken glass from a damaged building that was hit during Iran’s missile attack in Tel Aviv, Oct. 2, 2024. (AP/Ariel Schalit)

Finance Ministry accountant general Yali Rothenberg said in response to S&P’s downgrade that the decision “comes in response to the continuation of the war, heightened geopolitical risks, and the impact on fiscal data and the performance of the economy.”

“Israel’s balance of payments remains strong and the country continues to hold a significant current account surplus alongside high foreign exchange reserves, which are a security cushion for the Israeli economy,” said Rothenberg.

Direct war costs have ballooned to more than NIS 250 billion ($66 billion) since war on October 7 erupted after Hamas terrorists invaded Israeli southern communities killing some 1,200 people, mostly civilians, and taking 251 as hostages into the Gaza Strip.

Since October 8, Hezbollah-led forces have attacked Israeli communities and military posts along the border on a near-daily basis, with the group saying it is doing so to support Gaza amid the war there. The concern of potential escalation and retaliatory action was heightened after Israel carried out a major strike in Beirut late Friday evening that killed Hezbollah leader Hassan Nasrallah.

S&P said it now expects “continued, though likely reduced, military activity in Gaza alongside more intense fighting with Hezbollah lasting into 2025,” and an economic recovery to be delayed to 2026, assuming a stabilization of the security situation in the second half of next year. Therefore, the rating agency cut its growth forecasts to 0% in 2024 and 2.2% in 2025 from 5% previously and warned about “widening fiscal deficits both in the short- and medium-term as defense-related spending increases further.”

On a positive note, S&P uttered some confidence that “Israeli authorities remain committed to fiscal consolidation via a range of measures including the rationalizing of ministry spending, freezing of tax thresholds and others with the ultimate goal of stopping the rise in government debt as a percentage of GDP.”

Israelis take cover in central Israel during an Iranian missile attack, October 1, 2024. (Dor Pazuelo/Flash90)

As strengths of the Israeli economy S&P highlighted the country’s “adaptable and diversified economy,” as well as its ability to rebound “briskly from previous crisis.”

Moody’s late on Friday slashed Israel’s credit rating by two notches, from A2 to Baa1, citing the lack of an “exit strategy” to the military conflict, alongside domestic political risks, while scrutinizing the government’s wartime conduct as being responsible for further straining the country’s public finances.

S&P’s “wording is more positive than that of Moody’s and as a result, the rating dropped by only one level and like Fitch’s it remains two levels higher than that of Moody’s,” said Mizrahi Tefahot Bank chief markets economist Ronen Menahem. “S&P predicts stagnation in growth this year and a very high budget deficit of 9% [for 2024], far beyond the government’s target [of 6.6%] and the Bank of Israel’s forecast, but their forecast for 2026 indicates a faster recovery than the one portrayed in Moody’s forecast.”

Rothenberg called on the government to act swiftly to approve the state budget for 2025 to provide certainty to the economy and investors in Israel and around the world.

“A budget that will lead to the rebuilding of fiscal reserves, by maintaining a maximum deficit of up to 4% of GDP and will allow us to return to a declining path of the debt-to-GDP ratio,” said Rothenberg. “A budget that will encourage investment in growth engines and infrastructure, addressing social needs and meeting Israel’s security requirements.”

Times of Israel staff contributed to this report.