S&P warns Israel’s credit rating at risk of downgrade amid judicial jitters, Gaza war

Standard & Poor’s Global Ratings director Maxim Rybnikov warned on Tuesday that weakening state institutions and an ongoing war hampering economic growth pose major risks for Israel’s sovereign credit rating.

“By far, the biggest constraint for the rating today is really the institutional risk and also event risks,” said Maxim Rybnikov, London-based director at S&P Global Ratings, speaking via video conference at the Israel Democracy Institute’s Eli Hurvitz conference on Economy and Society in Jerusalem. “The institutional assessment is a factor which has a high weight in our current methodology, so it has an important influence.”

“We look at the existence of comprehensive checks and balances between various institutions, cohesiveness of civil society, data availability, and respect for the rule of law,” said Rybnikov.

Rybnikov’s comments come as Attorney General Gali Baharav-Miara warned Monday that the government was rapidly implementing far-reaching changes amounting to “regime change” while the public was distracted by the war in Gaza, joining the nation’s top judge, Isaac Amit, in cautioning against attacks on the independence of the judiciary.

Earlier this month, S&P reaffirmed Israel’s A/A-1 credit rating — which it had downgraded twice last year — while keeping its outlook negative, meaning that the country could be facing further downgrades. A lower rating raises credit costs for the government, businesses and households.

“We closely followed the geopolitical events last year, which significantly increased risks for Israel, and this is why the two downgrade rating actions took place,” Rybnikov remarked. “Going forward, we don’t know when and how the war is going to end.”

“For us, it certainly presents risks, especially in a scenario where there’s a more significant escalation, if Iran, for example, gets directly involved, which is not our baseline scenario, but if that would happen, we could see the influence on multiple credit factors across the board,” he cautioned.

Rybnikov noted that the rating agency could revise Israel’s credit outlook to stable from negative if there was a reduced “likelihood of military escalation broadening, especially with Iran.”

Israel on March 18 resumed its attacks against the Hamas terror group with a surprise wave of airstrikes, ending a two-month ceasefire. As part of the new offensive, Prime Minister Benjamin Netanyahu has vowed to continue the war until Israel achieves the declared goals of destroying Hamas, toppling its regime, and freeing Israeli hostages.

Terror groups in the Gaza Strip are holding 58 hostages — 57 of the 251 abducted by Hamas-led terrorists on October 7, 2023, when the Palestinian group led a devastating invasion of southern Israel that killed 1,200 people, mostly civilians.

Meanwhile, Israel is said to be getting ready to quickly strike Iran if ongoing talks between the United States and the Islamic Republic over the latter’s nuclear program break down.

Commenting on the main factors supporting the country’s credit rating, Rybnikov cited the “innovative and resilient Israeli economy.”

“If you remove the name of the country highlighting some of the data that we are looking at for example, the economic performance or the balance of payments, it’s very difficult to imagine that these numbers are really coming from a country with the current security situation that we are observing,” said Rybnikov. “I think that’s quite remarkable.”

Also speaking at the IDI conference, Bank of Israel Governor Amir Yaron commended the resilience of the Israeli economy despite the prolonged war but emphasized that it was facing “high domestic and global uncertainty in recent months.”

Yaron also warned the government about taking steps that would be interpreted by international markets and investors as steps that weaken the resilience and independence of state institutions.

“There is a vast body of economic literature that points to a positive correlation between strong state institutions and sustainable growth — this year, a Nobel Prize was awarded for this,” Yaron elaborated. “The more damage allowed to be inflicted on state institutions, the more this will affect the entire economy.”

“In the current state of the economy, with all its challenges, this is not the time to add more challenges and risk factors,” he urged.