Isranomics

S&P downgrades Israel’s credit rating

by | Apr 20, 2024 | Economy | 0 comments

In a tumultuous turn of events for Israel, a night marked by military response to Iran’s attack six days earlier was coupled with a blow to the nation’s economic credit rating. S&P, the renowned credit rating agency, made the sobering announcement of lowering Israel’s credit rating to A+ with a negative outlook.

The timing of S&P’s decision, accelerated by three weeks amidst a surge in Israel’s risk premium, reflects the seriousness of the situation. While S&P may issue a detailed report on Israel’s economic outlook on the scheduled date of May 10, the competing agency Moody’s is also poised to reassess Israel’s rating. However, further rating adjustments are unlikely unless the geopolitical situation experiences an abnormal escalation.

The downgrade in Israel’s credit rating is not solely attributable to external geopolitical pressures. Behind the scenes, the incessant arguments between the Ministry of Finance and the security apparatus have cast a shadow of uncertainty over the nation’s fiscal policies. The failure to provide fiscal stability has irked rating agencies, who perceive it as a significant risk factor.

Of particular concern is the perpetual disagreements over budget allocations, with tens of billions of shekels hanging in the balance. The recently reached consensus about NIS 100 billion for security strengthening over the next seven years is viewed as a mere starting point, with fears lingering over potential escalations in defence spending. The composition of the defence budget committee, skewed heavily towards the military, exacerbates apprehensions regarding fiscal discipline.

For rating agencies, characterized by a landscape fraught with uncertainties, the risk scenarios loom large. A more prudent approach by policymakers could have mitigated the negative forecast from S&P, which anticipates the possibility of further downgrades in subsequent rating rounds.

S&P’s outlook, while cautious, hinges on a relatively moderate baseline scenario. However, heightened security risks, coupled with additional defence expenditures and economic repercussions, threaten to exacerbate Israel’s fiscal challenges. The anticipated increase in the debt-to-GDP ratio, a pivotal metric for credit ratings, poses a formidable obstacle to reclaiming a higher rating in the foreseeable future.

In conclusion, the convergence of geopolitical tensions and fiscal uncertainties presents Israel with a formidable challenge that cannot be ignored. As the nation grapples with the ramifications of a lowered credit rating and the specter of heightened security risks, the onus falls squarely on policymakers to chart a course towards economic stability.

It is imperative that politicians set aside their differences and confront the current budgetary shortfalls in a methodical and decisive manner. The stakes are too high to indulge in partisan squabbles or to defer difficult decisions for later. Whether radical cuts are deemed necessary or alternative measures are pursued, the urgency of the situation demands swift action.

Postponing crucial decisions only serves to exacerbate the underlying fiscal vulnerabilities, jeopardizing the nation’s economic resilience in the long run. Israel cannot afford to kick the can down the road any longer. Failure to act promptly risks compromising the very economic stability upon which the nation depends.

Image credit: S&P Global considered to be one of the world’s largest credit rating agencies. Brendan McDermid/Reuters

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